US Dollar Price Forecast: Fed Hike Bets Lift DXY as EUR and GBP Weaken

Dollar Index Outlook: Fed Hike Bets and 5% Treasury Yields Lift Dollar as EUR and GBP Face Policy Tests The U.S. dollar starts the week stronger on a strengthening fundamental backdrop, with higher energy prices and elevated Treasury yields. Market participants have a higher perception of the likelihood that the Fed hikes interest rates tomorrow at 93%. The 10-year Treasury yield broke 5% for the first time since October this year with most of the market expecting a rate hike, and this reinforced the advantage that the dollar has with respect to yield. The Middle East conflict has exacerbated this situation. With increased violence in the region, disruptions to the flow of energy, and heightened concerns on inflation, all combined with weaker risk appetite, safe haven flows have favored the U.S. Dollar Index. While the dollar's next substantial move may depend on the lengths the Fed is prepared to extend its tightening cycle, with the move largely priced in, for now market participants are focusing on the impact of the ECB's rate hike. The U.S. yield curve has strengthened and the ECB hiking by 25 basis points last week, but the economic impact of higher energy prices combined with the tightening financial conditions has been weighing on the euro. From a policy perspective, the backdrop is less supportive. Thus, the euro has been unable to extend gains from the ECB's action, leading market participants to pay more attention to the impact of the U.S. yield curve on the euro. Sterling continues to cool with recent data releases on UK labor from Tuesday. Unemployment remained at 4.9% and wage growth remained at 3.5%. Additionally, vacancies fell to 702,000, which is the lowest level since 2021. These numbers have given the Bank of England (BOE) the ability to remain patient with the high and rising energy costs that drive inflation. Initially, markets priced in less than a third chance of a rate hike for Thursday's meeting. Although, many are now pricing in rate hikes this year after Thursday's meeting. Fundamental bias: DXY bullish, EUR neutral-to-bearish, GBP neutral-to-bearish, Wednesday's Fed guidance and Thursday's BoE decision will be the main catalysts. U.S. Dollar Index Technical Analysis: DXY Holds Above 99.58 as 99.74 Becomes the Next Upside Test Dollar Index Price Chart – Source: Tradingview Currently, the USD Index is trading at 99.65 on the 1-hour chart. The price is holding above the trendline which becomes increasingly higher, all while being comfortably above both the moving averages. The last break of 99.58 suggests that buyers are maintaining their control over the market, and might be approaching another cluster of resistance.

Dollar Index Outlook: Dollar Firms as Fed Hike Bets Rise, While ECB Tightening Tests Euro The US dollar begins its week with renewed fundamental support as soaring inflation and the Middle East energy crisis strengthen the case for another rate hike by the Federal Reserve. U.S. producer prices rose 0.4% in August and are another sign that pressed energy prices are beginning to impact inflation. Almost three-quarters of the bets made in Futures markets indicate that the Federal Reserve is expected to implement a 25 basis point hike at its next meeting. The 10 year treasury has also surged to 5%, indicating the market is becoming more concerned of stagflation. The main event of the day will be the consumer price index. A higher than expected inflation reading would aid the market's bets of a rate hike at the Fed's September meeting. A softer reading could reverse those expectations. The extended yield curve of the dollar is also giving the currency an added preference due to the fragile risk appetite caused by disrupted Middle Eastern energy supplies. The ECB made two moves yesterday with a 25 basis point hike on its deposit rate to 2.5% and setting a forecasted growth rate of 0.9% for 2026. The ECB is also projecting average inflation of 3% for 2022 and 2.5% for 2027. For the ECB, even higher interest rates will help gel yield differential, but risk of weakening the economy further remains. Sterling may be affected more by the policy divergence. The market is largely predicting that the Bank of England will keep interest rates at their current levels when they meet next. Bailey, who is the Governor, has been remarks against markets that show speculation of more hikes. GDP data for July is expected to show that the UK economy did not grow. The inflation and wage data will also help the BoE see how bad the effect of the energy shock will be on them. Fundamental bias: DXY bears moderately, EUR bulls may be neutral, GBP bears may be neutral. U.S. Dollar Index Technical Analysis: DXY Holds 98.72 as 99.16 Resistance Caps the Recovery Dollar Index Price Chart – Source: Tradingview Currently, DXY is trading at 99.07, having recovered from the 98.72 support zone. What I am seeing is price has recovered above the short-term moving averages, but the recovery is running into the 99.16 resistance zone where sellers are stepping in. This keeps the recovery constructive, but not strong enough for me to consider it a reversal. The first resistance zone I am looking at is 99.16. If price clears this, then 99.28 and 99.39 come into play. If price continues to fall, then 98.99 will until 98.88 and 98.72 become significant.

Dollar Index Outlook: Fed Hike Bets Rise as ECB Tightening and Inflation Risks Support EUR and GBP The greenback remains caught in a cross-current of a more hawkish Fed and strong, rising currencies against the dollar, as traders await critical inflation data. A 60 percent chance of a Fed rate hike for the September 15-16 meeting emerged after a stronger-than-expected employment report on Friday. Now the focus is on U.S. inflation. A more hawkish reading will reinforce the need for the Fed to hike. The Fed's Governor Waller noted that the next steps for the Fed will depend on upcoming trends for inflation. The Dollar Index has struggled to move despite all this. A strong yen carry trade unwind due to market speculation of Bank of Japan (BoJ) tightening sent the dollar lower. An unwinding of yen-funded carry trades dominated the dollar, and heightened U.S. dollars, tensions in the Middle East are driving MENA currencies to further strengthen. The U.S. dollar will experience rising energy expenditures but so will other currencies. Inflation concerns dominate the euro this week with the European Central Bank's (ECB) meeting. All 65 economists in the Reuters poll expect the ECB to increase their deposit rate by 25 basis points to 2.50 percent. Inflation for the Eurozone jumped to 3.3 percent. High energy prices from the Iran conflict drive the inflation. The discussion is turning to the possibility that September will only be the first in multiple hiking cycles. Deutsche Bank has already adjusted their forecast to include anticipating another hike in December. Like many central banks, the Bank of England faces challenges with the energy crisis. Inflation risks returning mixed with weaker economies and already tighter financial conditions. Therefore, the Bank of England is likely to look at the energy crisis and global bonds and their corresponding yields to hopefully gain some insights into what their next moves should be. This means that sterling is going to be very volatile to the next set of Bank of England policy updates and how global markets react to those policies. Meanwhile, the greenback side of the GBP/USD will be under the control of the updates to U.S. inflation which will be available this week. Fundamental bias: DXY neutral-to-bullish, EUR moderately bullish, GBP neutral-to-bullish. U.S. Dollar Index Technical Analysis: DXY Remains Bearish Below 99.20 as 98.71 Support Comes Into View Dollar Index Price Chart – Source: Tradingview The U.S. Dollar Index is currently trading at 98.88 on the 2-hour chart. What is notable is the level of price that has consistently been trading below both moving averages and respecting the descending trendline from the early September high. The latest price action has also failed to trade back above the 99.00 – 99.20 region, which continues to maintain the bias lower on a short-term time frame.