United States Dollar Index rises towards 102.50 ahead of Fed rate decision

• At around 102.40, the US Dollar Index edges up in early European trading on Wednesday.
• An unchanged rate decision is expected as traders prepare for Wednesday’s Fed policy meeting.
• A 92.8% likelihood of an October rate hold is implied by Fed funds futures, alongside an 84.4% probability of a December increase.

With Fed funds futures indicating a 92.8% probability of unchanged rates, the US Dollar Index (DXY) is trading around 102.40 in Wednesday’s early European session. Measuring the US Dollar (USD) against a basket of six world currencies, the index is firming near a two-week high as markets await the Federal Reserve (Fed) interest rate decision later on Wednesday.

After increasing its policy rate by 25 basis points (bps) last month to a range of 3.75%-4.00%, the Fed is widely expected to keep rates steady this time. Attention will also be on its signals about 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, the likelihood of a US rate increase is priced at 84.4%.

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."

For indications of the policy path ahead, traders will scrutinise comments from Fed policymakers, particularly Chairman Kevin Warsh. Hawkish signals could support the US Dollar against other currencies; conversely, dovish remarks could put near-term pressure on the DXY.

Dollar momentum meets positioning headwinds ahead of December FOMC

Of the four G10 central banks announcing policy decisions this week, Societe Generale strategists observe that “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 moderation in the dollar’s earlier momentum, they say 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,”. Societe Generale retains a conditional positive view, stating 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 also warns that “unless the ECB is very hawkish, European economic fundamentals will weigh.”

Warsh balances crisis caution with optimism on investment and AI

A score of 5.6 vs the established 6.1 baseline on the FXS Speechtracker puts Fed Chair Warsh’s latest comments slightly on the softer side, although his overall guidance remains largely unchanged. By acknowledging that he is “over-scarred” by the Global Financial Crisis, Warsh signals an enduring preference for protection 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 focus on AI, both as a prospective demand shock and a means of improving data-driven policymaking, sits alongside his unwillingness to commit in advance to October or December decisions. Together, these messages leave the policy outlook cautious rather than explicitly dovish for the Dollar.

Despite the modestly softer FXS Speechtracker reading, the speech left the FXS Fed Sentiment Index firmly in hawkish territory: it moved 0.00 points, holding at 127.51. The unchanged reading suggests markets regard Warsh’s crisis-informed caution, emphasis on financial stability and attention to AI-related upside risks as broadly compatible with an above-neutral policy bias for the Dollar.

Technical Analysis: US Dollar Index retains bullish bias above the 100-day SMA

Trading above both the Bollinger middle band and the rising 100-day simple moving average, Dollar Index Spot retains a positive bias on the daily chart. Although the upper Bollinger band appears to constrain immediate gains slightly, the 14-period Relative Strength Index is hovering near 63. That reading points to continued upward momentum rather than exhaustion from overbought conditions.

A decisive move through the upper Bollinger band at 102.60 would create scope for additional near-term gains. Should the index retreat, the Bollinger middle band around 102.05 offers the first support, followed by the lower band near 101.50. More substantial buying interest would be expected on a deeper decline towards the 100-day simple moving average around 100.65.

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