United States Dollar Index tests late July high, near 100.35 on hawkish Fed stance

• DXY attracts some dip-buyers and continues to draw support from the Fed’s hawkish outlook.
• The possibility of a Fed rate hike in October and December stands at 54% and 88%, respectively.
• Escalating tensions in the Middle East further benefit the safe-haven Greenback and favor bulls.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, regains positive traction on Friday and maintains its bid tone through the first half of the European session. The index remains within striking distance of the highest level since late July, though on Thursday, and currently trades around the 100.30 region. Moreover, the supportive fundamental backdrop backs the case for a further near-term appreciating move for the US Dollar (USD), which remains on track to register strong weekly gains for the first time in the previous three.

The US Federal Reserve (Fed), as was widely expected, raised interest rates for the first time since 2023 at the conclusion of the September policy meeting on Wednesday. Furthermore, the so-called dot plot revealed that Fed officials expect one more interest rate increase this year. Adding to this, Fed Chair Kevin Warsh underscored the importance of stabilizing consumer prices to grow the US economy, saying during the post-meeting press conference that inflation is too high and has been for too long. Meanwhile, oil-driven inflation risks underpin prospects for further Fed tightening.

Apart from this, escalating tensions in the Middle East turn out to be another factor underpinning the safe-haven Greenback. In fact, Iran's Islamic Revolutionary Guard Corps (IRGC) said that it struck a Togo-flagged tanker that attempted an illegal passage through the Strait of Hormuz. Moreover, US President Donald Trump said that he was approaching a major decision on whether to resume large-scale attacks on Iran. This keeps the geopolitical risk premium in play, which, in turn, validates the near-term constructive outlook for the DXY and favors bullish traders.

Dollar outlook turns as Fed repricing lifts DXY and USD forecasts

Economists at UOB Group highlight that the recent shift in Fed expectations has important implications for the Dollar. “As we now expect two further Fed rate hikes, the narrowing of US rate differentials relative to G-10 peers – which have been weighing on the DXY since late 2024 – is likely to reverse and underpin the DXY going forward,” the bank writes. Putting the evolving rate backdrop and currency dynamics together, UOB concludes that “we now see upside risks to our USD forecasts against both G-10 and Asian currencies.”

DXY daily chart

Technical Analysis

The DXY holds a constructive bullish bias above the 100-day Exponential Moving Average (EMA) and has reclaimed the 50.0% Fibonacci retracement. Any further move up could face immediate resistance at the 61.8% Fibo. retracement at 100.57, ahead of a stronger barrier at the 78.6% retracement near 101.12, while the cycle high at 101.82 marks a key medium-term cap.

On the downside, initial support is provided by the 50.0% retracement at 100.18, followed by the 100-day EMA at 99.69 and the 38.2% retracement at 99.80. Deeper demand levels emerge at 99.32 and then the structural low around 98.55.

(The technical analysis of this story was written with the help of an AI tool. Know more.)