The potential downside for the US Dollar Index may be limited as market participants are factoring in a 60% probability of a Federal Reserve rate increase, according to the CME FedWatch Tool. Rising oil prices exacerbate inflation concerns, contributing to the mitigation of losses for the Greenback. The upcoming US CPI and PPI inflation reports this week will play a crucial role in shaping the Federal Reserve’s policy decisions for September. For the third day in a row, the US Dollar Index, which compares the value of the US dollar to six major currencies, is declining and is currently trading at 98.80 on Wednesday during Asian hours. However, the downside for the Greenback could be limited as increasing oil prices heighten inflation concerns and bolster expectations for a Federal Reserve rate hike.
Crude oil prices have increased in response to a US strike on multiple Iranian tankers near Kharg Island, a significant export hub. These attacks have intensified geopolitical tensions and raised market apprehensions about possible disruptions to global oil supplies. Traders are currently pricing in approximately a 60% probability of an interest rate increase at the forthcoming policy meeting of the US central bank, as indicated by the CME FedWatch Tool. Looking ahead, the US Producer Price Index and Consumer Price Index inflation data will be of paramount importance later this week. These important readings could provide new insights into the Federal Reserve’s forthcoming decisions prior to the September meeting.
Economists acknowledge that, “under these circumstances, one might ask what would prevent the Fed from soon raising its policy rate for the first time since 2023 and, in the process, putting a floor under the greenback.” However, they caution against over-interpreting recent data and market moves, pointing to Fed Chair Kevin Warsh’s reminder in his inaugural Jackson Hole speech that “yesterday’s news has a way of getting mistaken for what is happening right now.” In their view, “that observation is particularly relevant in the bond market,” where shifting narratives can quickly cloud the underlying policy outlook. In the daily chart, the Dollar Index Spot is trading at 98.80, indicating a continuation of a bearish near-term bias as the price remains below both the nine-period Exponential Moving Average at 99.07 and the 50-period EMA at 99.69.
The configuration maintains a ceiling on the short-term trend due to these descending averages, while the 14-day Relative Strength Index hovering around 38 indicates persistent downside pressure rather than a forthcoming bullish reversal. On the topside, initial resistance is observed at the nine-EMA, with a more formidable barrier at the 50-EMA, where a recovery rally is likely to face challenges unless momentum shows signs of improvement. In the absence of distinct technical support levels indicated below the current price, traders might turn to previous swing lows on the broader chart to identify potential demand zones. Meanwhile, the muted reading of the FXS Fed Sentiment Index at approximately 125.72 suggests that the macro conviction supporting the dollar is relatively weak.
