US Dollar Price Forecast: Fiscal Risks Weigh on DXY; EUR/USD and GBP/USD Test Key Resistance

US Dollar News: Debt Fears Weigh as Euro and Pound Hold Firm

With the focus of global investors shifting away from the short-term economy to long-term fiscal credibility, the US dollar started its day on August 24 on multi-month lows. Although Treasury Department’s plan to double buybacks to the tune of $4 billion per operation on 10- to 30-year debt has eased concerns in some market circles, others are concerned that Washington intends to further suppress long-term borrowing via the deficit without remediation. U.S. 30-year yields are at 5.337%, last week’s 19-year highs, and a slightly better than expected Services report on Friday did little to push the dollar higher. Investors are watching both Friday’s speech by Fed Chair Kevin Warsh from Jackson Hole and July’s inflation for more insight on the possible direction and duration of monetary policy.

Buyer perception is that the ECB will continue to adhere to the fight against inflation after the September opening of a 2.5% deposit rate. In the meantime, while the recovery in Europe is uneven, sentiment in the markets is that recent growth data and business activity support the push for further inflation focus against the backdrop of the Iran conflict.

Sterling is further supported by the comparative relationship with the dollar. Fed Chair Kevin Warsh rose to 2.9% in July, while second-quarter GDP increased by 0.4%. There were also declines in retail sales and an unexpected budget deficit by the government which has weakened prospects. With all of this in mind, the best case scenario is still limited. Most economists predict interest rates will stay the same for the remainder of 2022. That said, inflation is still expected to rise enough to prompt the Bank of England for at least one interest rate hike in 2026.

For August 24, the primary FX theme is increased uncertainty over U.S. fiscal policy and treated the dollar as being weak, while the risks of tightening by the ECB and BoE supported the euro and pound.

U.S. Dollar Index Technical Analysis: DXY Holds Below $99.38 as Broader Trend Remains Bearish

For the U.S. Dollar Index, the 4-hour chart shows a price currently at $98.89 after breaking the $99.38 support. The price is below the 50, and 100, period Exponential Moving Averages (EMAs) confirming a bearish sentiment. The price has been attempting to stabilize in the range of $98.55 to $98.82, and has broken some support, but no major resistances have been established.

The USD Index Relative Strength Indicator (RSI) is at 44. It has improved from the oversold area but remains under neutral. The first resistance is at $98.99, and the subsequent resistances are at $99.13, $99.27, and $99.38. The targets after that are $99.71, and $100.03. The first support is at $98.55, and after that are $98.24, and $97.89.

While the price of the DXY remains below $99.38, the overall sentiment remains bearish. Recovery of the price above $99.38 would change some of the sentiment, but consistent rejection of the price below the EMA cluster would keep the sentiment bearish and may test $98.55 again.

GBP/USD Technical Analysis: Pound Tests Triple-Top Resistance Near $1.3656 as RSI Turns Overbought

GBP/USD has reached $1.3648 on the daily chart after rising to $1.3656-$1.3676, a significant area that has contained its moves many times, and forms a potential triple top. This area is likely to provide resistance in the next move lower. Price hovers well above the 50-day EMA, currently around $1.3455, and the 100-day EMA at $1.3434. So the overall trend remains bullish even with resistance present.

RSI has moved to 71 indicating the pair is overbought, and therefore may consolidate or move lower. We anticipate resistance at $1.3656 with area up to $1.3735 possibly containing the next move. The first significant support is likely to be at $1.3618, followed by $1.3572 and $1.3526.

We believe GBP/USD is ultimately bullish, but we are watching $1.3656-$1.3676 closely as this level combines a triple top resistance zone and overbought RSI. If this upper level resistance holds, we are likely to see a move lower to test $1.3618 or $1.3572. However, if the resistance can be broken to the upside, we could see a move to $1.3713 and $1.3735.

EUR/USD Technical Analysis: Euro Forms Double Top Near $1.1712 as Pullback Risk Increases

The Euro has made two attempts to break the resistance zone at $1.1700 to $1.1712 and has now created a double top formation. A bearish EMA cross of the 50 and 100 period EMA is also confirming a bearish sentiment. The main question now is to see if this will create a deeper pull back, or if this is just a reset in momentum for a move up.

Easing to 59 from previously overbought conditions, RSI now is indicating the cooling off of bullish conditions. Immediate support can be found at $1.1658. This is followed by Fibonacci levels at $1.1641, $1.1624, and the rising trendline at approximately $1.1640. Resistance levels are found at $1.1678, $1.1712, and $1.1737 in that order.

I am bullish on EUR/USD while it trades in the range of $1.1640-$1.1658, but avoid buying on this rally due to the double top around $1.1712. A break of $1.1640 will most likely bring the price to correct at $1.1624, while a strong break of $1.1712 will most likely bring the price to new highs in the bullish rally.