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

• A modest upward bias takes the US Dollar Index towards 102.40 in early European trade on Wednesday.
• An unchanged rate decision is expected as traders prepare for Wednesday’s Fed policy meeting.
• Fed funds futures assign a 92.8% probability to an October rate hold, while pricing in an 84.4% chance of a December hike.

The US Dollar Index (DXY) is gaining ground near a two-week high as markets await the Federal Reserve’s (Fed) interest rate decision later on Wednesday. Trading around 102.40 during the early European session, the index tracks the value of the US Dollar (USD) against a basket of six world currencies.

An unchanged policy interest rate is widely anticipated from the US central bank, with its guidance expected to signal the likelihood of a December move. Last month, the Fed increased its policy rate by 25 basis points (bps), taking the range to 3.75%-4.00%.

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 outlook will be closely watched, particularly those from Fed Chairman Kevin Warsh. Hawkish comments by Fed officials could strengthen the US Dollar against other currencies, whereas a dovish tone from policymakers could put near-term pressure on the DXY.

Can the Dollar Sustain Its Strength as Positioning Weighs Ahead of December FOMC?

Positioning is beginning to restrain the dollar’s earlier momentum, according to strategists at Societe Generale. Comparing the four G10 central banks announcing policy decisions this week, they 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).” Their assessment is 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,” which has moderated those earlier gains. On 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 the warning that “unless the ECB is very hawkish, European economic fundamentals will weigh.”

How Is Warsh Balancing Crisis Caution With Optimism on Investment and AI?

A slightly softer tone emerges from Fed Chair Warsh’s latest comments, although his broader guidance remains largely unchanged. His FXS Speechtracker reading of 5.6 sits just below the established baseline of 6.1. Describing himself as “over-scarred” by the Global Financial Crisis points to an enduring preference for protection against downside and tail risks. At the same time, Warsh identifies a phase of structural growth and a surge in investment supported by “good policies.” He also stresses AI’s potential both as an upcoming demand shock and as a means of improving data-driven policymaking. Together with his unwillingness to commit in advance to October and December decisions, these remarks leave the policy stance cautious without making it explicitly dovish for the Dollar.

Despite the marginally softer FXS Speechtracker reading, the speech left the FXS Fed Sentiment Index firmly in hawkish territory at 127.51, a change of 0.00 points. The unchanged reading suggests that markets regard Warsh’s crisis-shaped 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: Can the US Dollar Index Retain Its 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 constructive bullish outlook on the daily chart. The upper Bollinger band appears to be placing a modest limit on immediate gains. However, the 14-period Relative Strength Index remains close to 63, indicating that momentum favours further upside rather than exhaustion from overbought conditions.

A decisive move beyond the upper Bollinger band at 102.60 could pave the way for additional near-term gains. Should the index retreat, the Bollinger middle band around 102.05 provides the first support, followed by the lower band near 101.50. A more pronounced decline would be expected to encounter stronger buying interest at 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.)