Dollar Index Outlook: Fed Rate Hike Looms as EUR and GBP Face Diverging Policy Paths
The USD faces its first interest-rate decision post-COVID on Wednesday with the market pricing in an expected 25 basis point hike from the Fed. Futures were pricing in a 93% chance of a rate hike heading into the announcement with investors more concerned about the economic outlook in the US than before.
The limited impact of the anticipated rate hike on the USD is dependent on Chair Warsh framework for this policy decision. A one-off hike to regain tri bump inflation could limit any shock to the market and the greenback, while the start of a more aggressive tightening cycle would increase rate hike expectations and USD strength. The Fed's inflation target is 2.0%, and August inflation of 3.4% came with core inflation rising 0.3% for the month. Thearsi spiked 10-year US yields to the 5% territory before receding on Wednesday.
The USD is further supported by the relative rate picture as the eurozone inflation remains well above the target and the ECB's deposit rate hike of 25 bps to 2.5% is dominated by the potential for aggressive rate hikes by the Fed. A report from the ECB on Wednesday showed wage growth is expected to remain the same until 2027 with a slight upward trend thereafter.
According to Wednesday's inflation report for the UK, expect no surprise from the Bank of England when it meets Thursday to consider interest rate decisions. Headline inflation for August reached 3.1%, while core inflation stagnated at 2.6% and services inflation remained at 3.4%. The data suggests little evidence of the second-round inflation effect. Prices for the first hike by the BoE stand at around 20%.
Considering current economic dynamic factors, especially tomorrow's FOMC chair announcement, we're neutral to bullish for DXY, neutral to bearish for EUR, and neutral to bearish for GBP.
U.S. Dollar Index Technical Analysis: DXY Holds 99.54 Support as 99.73 Breakout Comes Into Focus
The U.S. Dollar Index is at 99.59 on the 1-hour chart and the focus of the analysis is on the fact that price continues to respect an upward sloping trendline by trading above the 99.54 breakout zone. Following the latest run, buyers have been defending this area and therefore the resistance zone is constructive even with some price consolidation below resistance.
The first zone of resistance that I will be focusing on is the 99.73 level. A break above this zone would target 99.85 and then 99.98. Support would come in at 99.54, with the zone of 99.39 and 99.25 becoming more prominent if the upward sloping trendline loses its definition.
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