Near 102.50: United States Dollar Index gains ahead of Fed rate decision

• 102.40 is the level in focus for the US Dollar Index. The index edges up towards it in early European trading on Wednesday.
• With rates expected to remain unchanged, traders prepare for Wednesday’s Fed policy meeting.
• 92.8% odds of an October rate hold are implied by Fed funds futures, alongside an 84.4% probability of a December increase.

102.40 is the current level of the US Dollar Index (DXY). Measuring the US Dollar (USD) against a basket of six world currencies, the index is strengthening near a two-week high in Wednesday’s early European session. The Federal Reserve (Fed) interest rate decision is due later on Wednesday.

Following last month’s 25 basis points (bps) increase, the Fed’s policy rate stands in a range of 3.75%-4.00%. Expectations broadly favour the US central bank holding rates steady while indicating the likelihood of a move in December.

According to the CME FedWatch tool, Fed funds futures imply a 92.8% probability that the Federal Open Market Committee (FOMC) will leave its policy interest rate unchanged. For December, markets assign an 84.4% chance to a US rate increase.

Chris Weston, head of research at Pepperstone Group in Melbourne, said: "The Fed doesn't need to hike today to move markets," adding: "It simply needs to change the perceived probability of hiking in December."

Further signals on the policy path will be closely watched by traders, particularly those from Fed Chairman Kevin Warsh. Hawkish comments from Fed officials could strengthen the US Dollar against other currencies. Conversely, dovish remarks could put near-term pressure on the DXY.

December FOMC in focus as long positions weigh on Dollar gains

Of the four G10 central banks announcing policy decisions this week, Societe Generale strategists say “the Fed is the one whose currency has been strongest in recent weeks,” although “the Canadian and New Zealand dollars have looked a little brighter in recent days (especially the NZD).” Explaining the loss of some earlier momentum, they argue that “the period from Fed Chair Kevin Warsh’s speech at Jackson Hole until the September FOMC, triggered a more positive backdrop for the dollar but gradually, the weight of long dollar positions has been felt,”. For the outlook, Societe Generale states that “if the FOMC message (whatever that looks like in the brave new world) keeps December hike expectations alive, our bias is to remain dollar-positive,” but adds a caution: “unless the ECB is very hawkish, European economic fundamentals will weigh.”

Warsh balances crisis caution with optimism on investment and AI

The FXS Speechtracker gives Fed Chair Warsh’s latest remarks a score of 5.6, against an established baseline of 6.1. That points to a slightly softer tone, although the guidance remains broadly stable. Warsh’s acknowledgement of being “over-scarred” by the Global Financial Crisis highlights an enduring preference for protecting against downside and tail risks. At the same time, he points to a structural growth phase and a surge in investment supported by “good policies.” His emphasis on AI, both as an approaching demand shock and as a means of improving data-driven policy, combines with his unwillingness to pre-commit on October and December decisions. The resulting stance remains cautious without being explicitly dovish for the Dollar.

A 0.00-point move left the FXS Fed Sentiment Index at 127.51 following the speech. Despite the modestly softer FXS Speechtracker reading, the index stayed firmly in hawkish territory. The unchanged reading suggests markets regard Warsh’s crisis-shaped caution, emphasis on financial stability and attention to AI-related upside risks as broadly aligned with an above-neutral policy bias for the Dollar.

100-day SMA underpins bullish US Dollar Index: Technical Analysis

On the daily chart, Dollar Index Spot retains a positive bullish outlook, supported by its position above the Bollinger middle band and well above the rising 100-day simple moving average. The upper Bollinger band appears to restrain immediate gains to a limited extent. However, a 14-period Relative Strength Index near 63 indicates that momentum still favours further upside rather than overbought exhaustion.

A decisive move through the upper Bollinger band at 102.60 would create scope for additional near-term gains. If prices retreat, the Bollinger middle band around 102.05 provides the first support, followed by the lower band near 101.50. A deeper decline would be expected to meet stronger demand around 100.65, at the 100-day simple moving average.

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