US Dollar Kicks Off Critical Week Under Pressure From Rising Rate Cut Expectations
2024.09.16 06:34
After last week’s data, the climbed to 101.83 as expectations for a 25 basis point Fed rate cut grew. However, mixed reactions to the data shifted market expectations towards a 50 basis point cut, leading the DXY to fall to around 100.7.
Now as we move into a pivotal week for the global FX market, traders should expect added volatility ahead of the Fed’s on Wednesday due to reduced liquidity from Chinese and Japanese public holidays.
Also, geopolitical risks, including recent Middle East tensions and a failed assassination attempt on US Presidential Candidate Donald Trump, might also temper the dollar’s decline for the time being.
However, the main focus for trades continues to be the flurry of Central Bank decisions this week, with the and the on tap along with the all-important start of the Fed’s rate cut cycle.
Fed to Cut Rates by 25 or 50 Bps?
Odds of a 50 Bps cut by the Fed have been growing, according to our . This will likely have a major impact on the DXY ahead of the decision as traders now look to assess the depth and form of the Fed rate cut cycle as whole.
A 50 basis point cut could lead to dollar outflows and increased demand for riskier assets. If the Fed’s cut indicates concerns about a recession, the dollar’s decline might be limited, and the outlook could stabilize.
If the Fed opts for a 25 basis point cut, the dollar might strengthen temporarily, potentially causing the DXY to rebound later in the week.
More importantly than the actual outcome are the Fed’s subsequent statements. Strong comments about the economy could address recession fears and influence the dollar’s movement.
Technical View
Technically, the DXY faces resistance at 101.8, creating a double top pattern. Support around 100.5 has attracted reaction buying, reflecting past demand and suggesting a cautious market response to ongoing uncertainties.
Following the PPI data, rising expectations for an interest rate cut pushed the DXY back into the demand zone.
The DXY will likely face the interest rate decision within this support zone. Currently, the daily outlook shows the Stochastic RSI and short-term EMA values trending bearish. If the Fed cuts rates by 25 basis points, contrary to expectations, the move might be seen as supportive of the dollar. In this scenario, the DXY could bounce from 101.5 and negate the double top pattern.
If the rebounds, watch for resistance at 101.8, followed by 102.6 and 103.3.
Conversely, if the Fed cuts rates by 50 basis points as anticipated and delivers strong statements to alleviate recession concerns, the DXY might decline towards the short-term support-resistance range, potentially falling to 99. Easing geopolitical tensions could further support this decline and boost risk appetite.
Overall, the Fed’s interest rate decision and accompanying rhetoric will play a crucial role in determining the dollar’s direction.
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