US Dollar Forecast: DXY regains 105.00 on risk-off, Fed hawkish hold

The USD Index (DXY) clinched its second straight week of gains.
An interest rate cut by the Fed in September is not ruled out.
The Federal Reserve delivered a hawkish hold on Wednesday.

The next target comes at the 2024 high around 106.50

Quite a positive week saw the Greenback reach levels last seen in early May in the 105.80 region, when tracked by the US Dollar Index (DXY) at the end of the week. Indeed, the index advanced for the second consecutive week, underpinned by the resurgence of political jitters in the European region as well as prospects for the continuation of the tighter-for-longer narrative around the Federal Reserve (Fed).

Investors see two rate cuts, the Fed just the one

Following a steep pullback recorded on the back of the lower-than-expected US inflation figures in May, as per the Consumer Price Index (CPI), the US Dollar (USD) managed to regain composure vs. the risk-linked galaxy on the back of:

Primarily, political concerns are escalating in Europe, reignited by the success of far-right political parties in the European parliamentary elections on June 9. In response, French President Emmanuel Macron has called for snap elections to be held on June 30, with a second round anticipated on July 7. From this day on, it was all the way down for the likes of the Euro (EUR), motivating EUR/USD to lose more than 1% since the start of business on Monday.

Secondly, while the Fed left its Fed Funds Target Range (FFTR) unchanged at 5.25%–5.50%, as widely telegraphed, the Federal Open Market Committee (FOMC) favoured just one interest rate cut this year, mostly in December. Supporting this view, the majority of members, Chair Jerome Powell included, adhered to the view that the start of an easing cycle needs more confidence that inflation is heading towards the 2% goal on a sustained basis, which is not the case for the time being.

Nonetheless, the probability of lower rates at the September 18 gathering hovers around 70%, nearly 85% in November, and hits almost 97% by year-end, according to the FedWatch Tool by CME Group.

US yields did not accompany the Dollar’s rebound

The strong resurgence of the buying pressure in the Greenback did not echo on the US money market, where the demand for the fixed-income space remained firm, dragging yields to multi-week lows across different maturity periods.

G10 central banks: Navigating rate cuts and inflation

Among G10 central banks, the European Central Bank (ECB) reduced its rates by 25 bps at its meeting on June 6, although it poured cold water over the likelihood of subsequent cuts during the summer, particularly after revising up its forecasts for inflation. In the same tone, the Bank of Japan (BoJ) delivered a dovish hold on June 14. Moving forward, the Bank of England (BoE) is expected to reduce its policy rate somewhat sooner than previously thought after the downside surprise in domestic inflation in April, while the Reserve Bank of Australia (RBA) is likely to begin easing in the first half of the next year.

Upcoming key events

Next week will be shorter than usual, as markets will be closed on June 19 due to the Juneteenth National Independence Day. Data-wise, the most exciting release will be the advanced PMIs towards the end of the week, while special attention will be paid to the resumption of comments from Fed officials following the FOMC event on June 12.

Techs on the US Dollar Index

Following recent lows in the 104.00 neighbourhood, the US Dollar Index (DXY) regained strong momentum and marched to fresh multi-week tops past the 105.00 barrier.

Should the index break above the June high of 105.80 (June 14), it might attempt to reach the 2024 top of 106.51 (April 16). Surpassing this level could lead to the November peak of 107.11 (November 1), ahead of the 2023 high of 107.34 (October 3).

On the flip side, in case bears regain some initiative, DXY is expected to meet initial contention at the key 200-day SMA of 104.46 prior to the June low of 103.99 (June 4). A deeper retracement could test the weekly low of 103.88 (April 9) prior to the March bottom of 102.35 (March 8) and the December low of 100.61 (December 28), all before the psychological barrier at 100.00.

Overall, the bullish bias is expected to persist as long as DXY remains above the key 200-day SMA.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

US Dollar PRICE Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the British Pound.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.37%	0.63%	0.17%	-0.04%	0.29%	0.47%	-0.36%
EUR	-0.37%		0.26%	-0.17%	-0.43%	-0.06%	0.08%	-0.73%
GBP	-0.63%	-0.26%		-0.46%	-0.67%	-0.31%	-0.17%	-0.98%
JPY	-0.17%	0.17%	0.46%		-0.22%	0.11%	0.27%	-0.52%
CAD	0.04%	0.43%	0.67%	0.22%		0.34%	0.49%	-0.32%
AUD	-0.29%	0.06%	0.31%	-0.11%	-0.34%		0.16%	-0.64%
NZD	-0.47%	-0.08%	0.17%	-0.27%	-0.49%	-0.16%		-0.80%
CHF	0.36%	0.73%	0.98%	0.52%	0.32%	0.64%	0.80%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

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