Dollar Price Forecast: Fed Hike Looms as EUR and GBP Face Diverging Policy Paths

Wednesday brings the dollar’s first post-COVID interest-rate decision from the Federal Reserve, and traders are pricing in a 25 basis point increase with near certainty. Before the announcement, futures showed a 93% chance of the move, as investors have become more concerned about the US economic outlook.

How Chair Warsh handles the decision will determine whether the dollar moves at all. A one-off rise to recapture lost inflation momentum might keep the greenback steady by limiting any market shock. A more aggressive tightening cycle, however, would raise rate-hike expectations and strengthen the dollar.

What the Fed Has Said

The Federal Reserve has set its inflation goal at 2.0%, and the latest reading for August showed inflation standing at 3.4%, with core inflation increasing by 0.3% over the month. The ten-year yield on US government bonds jumped into the 5% range before easing back on Wednesday.

This policy decision’s framework explains why the effect of the increase will be modest. Restoring the lost inflation gain with a single adjustment should prevent any jolt to the market and the dollar, whereas beginning a tighter approach would raise forecasts for further rate increases and strengthen the US currency.

Europe’s Path

The ECB has pushed up its deposit rate by 25 basis points to 2.5%, yet Eurozone inflation still sits far above target. The size of that move pales in comparison to what the Fed could do with its own aggressive rate hikes.

The ECB’s report published on Wednesday says wage growth is expected to stay steady through 2027, followed by a modest increase after that.

Britain’s Numbers

On Thursday, the Bank of England meets to discuss interest rates, while Wednesday’s inflation report shows scant proof of the second-round inflation effect.

Inflation for August hit 3.1%, with core inflation staying flat at 2.6% and services inflation holding steady at 3.4%. The cost of living now sits roughly where it was after the first interest rate increase from the Bank of England, which stands at around 20%.

The Technical Chart

The DXY, the measure of the dollar against a basket of major currencies, is at 99.59 on the 1-hour chart. Price continues to respect an upward sloping trendline by trading above the 99.54 breakout zone. Buyers have been defending this area, so the resistance zone is constructive even with some price consolidation below it.

The initial barrier to watch is the 99.73 level. Should it give way, the next targets are 99.85 and then 99.98. Below, support materialises at 99.54, while the region defined by 99.39 and 99.25 becomes more significant if the rising trendline loses its clear shape.

How the Levels Rank

The key levels are arranged in order from lowest to highest:

1. Support zone: 99.54, with lower levels at 99.39 and 99.25
2. First resistance: 99.73
3. Further targets: 99.85 and then 99.98

The Forecast’s View

Given the present economic forces at play, including tomorrow’s announcement regarding the FOMC chair, the outlook calls for DXY to be neutral to bullish while EUR and GBP both sit at neutral to bearish.

A projected Fed increase is tied to how the dollar stands up against the euro and pound, with technical study of the DXY giving a distinct, concentrated way of looking at it.

Here is how the key levels stack up:

• Current DXY level: 99.59 on the 1-hour chart
• Support zone: 99.54, with lower levels at 99.39 and 99.25
• First resistance: 99.73
• Further targets: 99.85 and 99.98

Whether the Fed moves once or begins a complete tightening cycle will determine the dollar’s direction. On the technical chart, buyers appear prepared to hold the 99.54 level. A push past 99.73, however, would open the door to gains above it.

dollar · EUR · Fed · forex · GBP · technical analysis