US Dollar Price Forecast: Fed Hike Odds Lift DXY as EUR/USD and GBP/USD Weaken

Dollar Index Outlook: Fed Hike Bets Surge as ECB Tightens and Oil Shock Tests Sterling

The U.S dollar kicks off the week on the back of firmer fundamental support. Persistent inflation and another spike in energy prices are increasing predictions that the U.S. Federal Reserve will raise interest rates on their next scheduled meeting day, Wednesday. Currently, markets are pricing in a 86% chance of a 25 basis point increase. Last month’s consumer price index data surprised to the upside and has convinced Goldman Sachs to reverse their earlier call of keeping rates steady, and J.P. Morgan to call for interest rate hikes in both September and December in tandem.

Even though tighter monetary policy in the U.S. is expected to push against market rates in Treasuries, the relatively passive response in the Dollar Index is due to a few factors. For one, other developed markets appear to be more in lockstep with U.S. monetary policy and also appear to be forward leaning on rate hikes (i.e. The Bank of Japan is expected to hike rates this current week). Additionally, concerns related to the appointment of Kevin Warsh as the next chairman of the Fed are capping the dollar gains against rates in the U.S..

Focus for the Euro is what occurs post the recent European Central Bank (ECB) decision. The ECB chose to increase interest rates by 25 basis points for the second time in 2022. Renewed increases in inflation, driven by rising energy prices, has policymakers focused on good policymaking. EUR/USD initially sold off on the news as investors digested the growing income risks against slowing economic conditions. Speeches from President Lagarde and many of her colleagues are due at various points today, market participants should closely follow these speeches for update on future policy decisions.

For sterling, the main event this Thursday is the Bank of England meeting. About 75% of participants expect the BoE to stand pat. In the absence of any blow-up Middle East conflict, we’ll see increased re-invigoration in demand for higher yielding assets. However, ruptures to Middle East Oil continue to grow and will further increase oil prices. Increased oil prices will lead to inflation in the UK, narrowing policy divergences between the BoE, Fed and ECB.

Fundamental bias: DXY moderately bullish, EUR neutral, GBP neutral, with this week’s Fed and BoE decisions likely to determine the next major policy divergence.

U.S. Dollar Index Technical Analysis: DXY Breaks Above $99.26 as $99.39 Comes Into Focus

The US Dollar Index has broken above $99.26 on the 1 hour chart and is trading around the $99.32 level. What is interesting about the current price movement is that price is now trading above the two short term moving averages and is respecting the rising channel. So, while this may be another short term bounce in price, it is likely to have structure. The $99.39 level is the next resistance level that may be tested, above this level price can extend and test $99.50, $99.62 and $99.76. Below $99.26 the last key resistance, price may now test $99.09 and $98.98 support levels.

The RSI (Relative Strength Index) is respecting the upper end of the range, indicating that the momentum is still in the bullish direction, and price above $99.26 is likely to remain in the bullish direction. Price remains bullish above $99.26. Price below $99.09 would likely lead to a bullish view reversal. A push above $99.39 is likely to lead to price extending to the $99.50 and $99.62 levels.

GBP/USD Technical Analysis: Sterling Stays Below 1.3529 as 1.3476 Support Returns to Focus

The GBP/USD is currently trading at the 1.3505 level on the 2 hour time frame. What is most relevant to me, and what I think is most important, is that price is continuing to make lower highs, while trading sideways below both moving averages, and is below the descending trend line. The last bounce has broken below the level of 1.3529, and so holds a bearish bias.

The level that I want to highlight is 1.3476. If this level is broken in a clean and orderly manner, it would allow 1.3458 and 1.3435 to come into play. On the other side of the equation, 1.3529 is the first bearish resistance level, with the levels of 1.3565 and 1.3584 coming into play if bullish momentum returns to the market.

The RSI is currently in a bearish range. I maintain a bearish bias, however, if the market remains trading below the descending trend line and the level of 1.3529. A switch of bias may happen if the market closes trading above the level of 1.3565 to the bullish side, and if the market is closed trading below the level of 1.3476 to the bearish side.

EUR/USD Technical Analysis: Euro Breaks Rising Support as 1.1545 Becomes the Next Downside Test

EUR/USD is trading near 1.1569 on the 2 hour chart and has broken below the rising trendline and the support at 1.1592. What is interesting to watch is that price has now moved below the two moving averages and the broader descending trendline continues to contain price movements. EUR/USD may now test 1.1545 as resistance, with support potentially in the $1.1523, $1.1505 and $1.1501 levels. The RSI (Relative Strength Index) is within the bullish zone and has lots of room before it can be considered overbought; so price is likely to be bullish, below $1.1592. A break below $1.1592 would be likely to lead the bullish view to reverse.

A break above $1.1592 would lead to an extension towards $1.1644 and $1.1714. Currently, I am monitoring 1.1545. A drop beneath that would place 1.1512 and 1.1482 possible next targets. For now, 1.1592 provides resistance with 1.1620 and 1.1654 levels becoming important should the buyers attempt to recover the price.

Dipping to a lower range on RSI shows the market is showing very little enthusiasm, if any, which should not encourage chasing, but also shows slow momentum to the downside. I am leaning to the bearish side with the EUR/USD trading below 1.1592–1.1620. Breaking above that should have me re-evaluating that stance. A breakdown below 1.1545 should conform to the bullish outlook.