Dollar Index Outlook: Strong U.S. Data Fuels Fed Hike Bets as EUR and GBP Face Policy Divergence
The dollar was broadly higher yesterday, particularly versus the euro and the British pound. More hawkish comments from Fed officials and signs of further strength in the U.S. economy gave the dollar an added boost.
The U.S. services and composite PMIs for September were both released yesterday and showed further expansion in U.S. services and composite activity. The U.S. composite PMI came in at 58.4, the highest level since July 2021.
Strong economic data bolstered expectations for another large rate hike next month. The latest CME Group data shows the odds for a 75 basis point hike in October are now at 66 percent. A 50 basis point hike was considered more likely earlier in the week.
Multiple Fed officials spoke yesterday and reiterated the need for further rate increases. Governor Barr said that rate increases would continue until inflation is more in line with the Fed’s 2 percent target. The other members of the Fed who spoke yesterday all gave similar remarks and said that the recent economic data justified the need for continued rate hikes to combat inflation.
The dollar has stronger nearby drivers of demand than the euro. The European Central Bank (ECB) hiked rates last month, but has signaled no strong preference to raise rates again. Bets against the euro could pay off if energy prices keep falling and further easing measures are put in place.
Sterling is more balanced. The Bank of England (BoE) held rates steady at 3.75% last week, but revised its outlook to more hawkish. The BoE and other hawkish central banks give the British currency some protection against falling energy prices. Barclays and UBS expect an interest rate hike by the BoE in November.
Ongoing Middle East diplomacy will also influence inflation. Falling energy prices should ease inflation across the U.S., Europe and Britain, which could impact rates set by the three central banks.
Overall, we have a DXY bullish bias, bearish EUR and GBP bias.
U.S. Dollar Index Technical Analysis: DXY Holds 101.01 as 101.23 Resistance Comes Into Focus
The U.S. Dollar Index (DXY) is currently (2-hour chart) at 101.03. I’ve been watching DXY as it has been forming a rising trendline since bouncing from 100.31. Most recently, DXY pulled back from the rising trendline and is testing the 101.01 level. As long as DXY holds above 101.01, the trend will remain bullish in the short-term.
The first level of resistance is at 101.23. Should 101.23 be taken out, expect DXY to target the 101.44 level, and possibly the 101.63 level. Looking at the downside, the trendline and 101.01 would provide support. Below 101.01 expect 100.88, 100.77, and 100.66 to provide support.
The Rising trendline, along with 101.01, provides significant support. If 101.01 is lost, it would take a move below 100.88 to turn the trend bearish. As long as 101.01 holds, I would expect DXY to retest 101.23. If 101.23 is broken, the upside would be targeted towards 101.44 and 101.63.
EUR/USD Price Forecast
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See all EUR/USD forecastsGBP/USD Technical Analysis: Sterling Rebounds From 1.3224 as 1.3268 Becomes the First Recovery Test
GBP/USD is trading near 1.3249 on the 2-hour chart after bouncing from the 1.3224 support area. What stands out to me is that the pair remains below both moving averages and the broader descending structure, so the current rebound has not yet changed the bearish trend. Still, the reaction from the recent low shows that sellers are beginning to meet stronger demand.
The first resistance I am watching is 1.3268. A clean break above that level would expose 1.3287, followed by 1.3306 and 1.3325. On the downside, 1.3224 is the first important support, with 1.3204 and 1.3186 becoming more relevant if selling pressure returns.
RSI is rebounding from oversold territory but remains in the lower half of its range, which tells me the recovery is still fragile. I am leaning bearish while GBP/USD remains below 1.3268–1.3287. A sustained move above 1.3306 would make me more constructive, while a break below 1.3224 would strengthen the case for 1.3204–1.3186 next.
EUR/USD Technical Analysis: Euro Rebounds From 1.1370 as 1.1400 Resistance Caps Recovery
The Euro has rebounded from the 1.1370 support and is currently trading at 1.1395. While the 2-hour chart shows that the Euro is trading sideways and is currently beneath both the 20 and 50 moving averages, and is also trading beneath a descending trend line, the Euro has been forming an uptrend since January, which makes the recent move higher appear corrective.
If the recent Euro move higher is corrective, then the 1.1400 resistance level would be the upper limit. If the 1.1400 level is taken out, then the 1.1418 and 1.1433 levels would come into play. Support would be provided by the 1.1370 level, with the 1.1355 level coming into play if the Euro moves lower.
The RSI also support the upside being limited and is currently neutral. If the 1.1400 level is taken out, then a move to the 1.1418 level and 1.1433 level would be likely. If the support levels hold, then the uptrend from January would remain.
