Dollar Index Outlook: Fed Hike Bets Support Dollar as EUR and GBP Face Diverging Policy Paths
The Federal Reserve’s hawkish stance on inflation has strengthened the U.S. dollar on Monday as investors expect the central bank to increase interest rates beyond the recent increase. The CME Group’s FedWatch tool shows that the chances of a 0.25% hike in the target range for the federal funds rate in October has increased to around 56%, from 43.5% last Wednesday.
On Monday, St. Louis Fed President Alberto Musalem said that he expects that inflation will remain above the central bank’s target for a prolonged period of time, and that further increases to the policy rate will be appropriate. According to the latest projections from the Fed, the policy rate will be increased in December.
In the short term, the declining price of oil could mitigate the effects of a stronger U.S. dollar. Declining Treasury yields have eased investors’ concerns about energy supply. However, the U.S. dollar has appreciated against a group of peer currencies over the last few weeks, and it is expected that U.S. yields will continue to increase.
The euro has fewer near-term catalysts. The European Central Bank raised rates in July. However, some officials recently said not to read too much into energy price increases and that they don’t necessarily call for larger rate increases. Falling energy prices should ease inflation, which supports the case for no further rate increases.
There is more support for the British pound. The Bank of England kept rates at 3.75% last week, but said it could increase rates if the disruption in the energy supply from the Middle East continues. Three months’ worth of inflation swaps, which reflect market expectations for future interest rates, show a 65% probability of a rate increase in November and indicate that the bank could increase rates by an additional 1.25 percentage points by the end of 2027. Other recent economic data supported the case for higher interest rates. August’s retail sales grew and July’s GDP growth was greater than expected.
Fundamental bias: I am neutral to slightly bullish on the British pound and euro against the dollar.
U.S. Dollar Index Technical Analysis: DXY Holds 100.33 Support as 100.53 Breakout Comes Back Into Focus
The U.S. Dollar Index is currently trading at 100.45. I’m interested in the short-term trend. Note that the index is trading above a rising trendline and recent support at 100.33. A quick buy of the dip to the rising trendline indicates that 100.33 and the rising trendline continue to delineate supporting levels.
The 100.53 level represents the next major resistance. Should 100.53 be taken out, the next levels of interest would be 100.68 and 100.83. The 100.33 level, rising trendline, and 100.19 would provide support should the current uptrend be surrendered. The 100.04 and 99.89 levels would also provide support.
From a momentum perspective, the Rising trendline and current support at 100.33 are providing support to the bullish outlook. A move below the 100.19 level would negate this outlook. The bullish outlook would also be negated should a move above 100.53 lead to a breakout to the upside with the next target levels at 100.68 and 100.83.
EUR/USD Price Forecast
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See all EUR/USD forecastsGBP/USD Technical Analysis: Sterling Holds 1.3365 Support as 1.3405 Remains the Key Recovery Hurdle
The GBP/USD pair trades at 1.3372 and is consolidating above the 1.3365 support level on the 2 hour time frame. Currently, the price action is below the 200 and 100 hour moving averages and a descending trend line. However, the pair has recently formed a series of higher lows from 1.3336 and this suggests that bears have lost their momentum to push the pair lower.
If the bulls can break the 1.3405 resistance level, then the trend line and higher levels would come into play. The 1.3365 support level would be the next floor if the bears make a return. The 1.3336 and 1.3307 levels would also see increased interest if the sellers gain control.
The relative strength index (RSI) is in the center suggesting that no clear trend is present. With the 1.3405 level as a resistance and the trend line as a lower boundary, a bearish bias is warranted. A bullish bias would be realized if the 1.3436 level is cleared to the upside. The 1.3336 level would also come into play on the downside if support is broken.
EUR/USD Technical Analysis: Euro Slips Back Toward 1.1457 as Descending Trendline Keeps Pressure Intact
EUR/USD is currently trading at 1.1461. It is hovering around the 1.1478 resistance level which has capped its upside moves and above which further upside is expected to be seen.
Nonetheless, EUR/USD is below both the 20 and the 100 hour moving averages and a descending trendline which continues to give a bearish bias. The upward move from the lows is also capped by the 1.1492-1.1502 resistance level.
The near term 1.1457 level is the first support below which the 1.1444 and 1.1430 support levels are located. The 1.1478 resistance level is located above which is followed by the 1.1492-1.1502 levels, and then by the 1.1513 resistance level.
RSI is also indicating bearish momentum. Bearish bias will be in effect as long as prices are below the 1.1478 and 1.1492 resistance levels and the descending trendline. A break above 1.1502 is expected to give a bullish outlook.
