On Friday, the U.S. dollar index (USDX) traded above the 105 mark, reaching its highest levels in six months on strong economic data in the United States, which sparked optimism that the Federal Reserve (Fed) could successfully engineer a “soft landing” — a slowdown in economic growth that avoids a recession — even if it continues to maintain higher interest rates for an extended period.
In August, U.S. retail sales went up by 0.6% on a month-on-month basis, surpassing the forecasted 0.2% increase. Producer prices also climbed by 0.7%, marking the most significant uptick since June 2022, and surpassing market expectations for a 0.4% rise.
Traders are still placing their bets on the Federal Reserve keeping interest rates unchanged in the upcoming week, while the central bank's next move in November remains a topic of debate.
According to CME’s FedWatch tool, the market is currently expecting a 97% probability that the Fed will maintain its target rate range within 5.25% to 5.50%. The probability of a 25 basis-point hike in early November stood at 30%, as of September 15.
The USD strengthened as the euro to dollar rate (EUR/USD) fell following the European Central Bank (ECB) decision to hike interest rates on Thursday, which many analysts believe marks the conclusion of its current tightening cycle. In contrast, the greenback weakened against the yuan, as China reported stronger-than-expected economic data for August.
Markets.com Chief Market Analyst Neil Wilson shared his take on the upcoming FOMC meeting in an overview on Friday:
“The main question overhanging the meeting is on the dot plot. With the latest round of economic projections due, we will see whether policymakers still see one more hike this year. If the dots are the same as June, markets could move to price in a higher likelihood the Fed hikes in November and push back on when the Fed starts to cut. If the median dot is lower than the 5.6% forecast in June, then it could be the signal to the market that the Fed is done.”
The Fed's dot plot is a chart that documents the projected key short-term interest rate of each Federal Reserve official. Within this plot, the dots indicate the anticipated midpoint of the federal funds rate at the conclusion of each calendar year — typically three years into the future — based on the officials' expectations regarding the evolution of the economy. The officials also include a dot representing their projection for the longer term, which signifies the "neutral rate of interest." This neutral rate is the point at which interest rates are neither stimulating nor constraining economic growth.
Each dot on the chart corresponds to a specific Federal Reserve official, ranging from Chairman Powell to board member Lael Brainard, and from New York Fed President John Williams to Chicago Fed President Charles Evans. The identities of the officials behind each dot remain anonymous, preserving the confidentiality of their individual projections.
Francesco Pesole, FX Strategist at Dutch bank ING, said that further expectations for the USD trend and the DXY index are located to the upside:
“The next resistance for DXY is the 105.85 March high: beyond that, it would explore levels last seen in November 2022. Today is starting on a more risk-supportive tone in FX, as China’s August industrial production and retail sales both surprised to the upside, fueling expectations that the worst may be behind us on the Chinese data flow. The dollar may correct a bit lower today, but the risks remain skewed towards further strengthening in the near term, or at least until the US activity picture starts to show some cracks.”
In his G10 FX Daily on September 15, Scotiabank Chief Currency Strategist Shaun Osborne wrote that the USD trend might see a correction down the line, but is nevertheless in line for nine straight weeks of uninterrupted growth:
“The DXY has dipped somewhat from yesterday’s peak but remains firm and is heading for a ninth consecutive weekly gain. The index tested the 38.2% retracement of its Oct 2022/July 2023 decline (105.38) yesterday. Streaks of consecutive (daily/weekly) gains in the major currencies rarely stretch far into double digits, so the broader USD uptrend is looking riper for a consolidation or correction. The BBDXY is trading net down on the week and technically signaling a consolidation may develop while the DXY is stretching spread-based gains even more significantly relative to fair value, according to my simple model. Bearish cues for the USD are not at all obvious at the moment, but the USD could steady as markets eye next week’s FOMC decision.”
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