Dollar Bulls Bet On Another Rate Hike

Key Insights

• Traders wait for the Fed decision, which will be released next week.
• The central bank may raise the rate one more time this year, which will be bullish for the U.S. dollar. 
• If Powell sounds dovish at the upcoming meeting, U.S. Dollar Index may pull back towards the 103 level.

Forex traders have already started to prepare for the upcoming Fed Interest Rate Decision, which will be released on September 20.

The FedWatch Tool indicates that there is a 93.0% probability that Fed will leave the interest rate unchanged at the upcoming meeting.

At the same time, traders have not made up their minds about the outcome of the next meeting in November. Currently, markets estimate that there is a 37.7% probability of a rate hike in November.

The yield of 2-year Treasuries has stabilized near the 5.00% level as traders bet that Fed will keep rates at high levels in the next quarters. The changes in Fed policy outlook and rising Treasury yields have provided material support to U.S. Dollar Index, which is up by more than 5% from July lows.

The dollar’s move was driven by the better-than-expected U.S. economic data. Traders ignored recession risks and focused on inflationary risks, which was bullish for the American currency.

The key question is whether Fed believes that it can afford another rate hike this year. At current point, it is obvious that interest rates are near their peak. Fed does not have an opportunity to push the federal funds rate above the 6.00% level as it will put too much pressure on the economy and hurt the country’s finances.

As Fed does not want to hurt the economy, it will wait for more data before making a decision. That’s why markets expect that the central bank will leave the federal funds rate unchanged on September 20.

The near-term dynamics of the U.S. dollar will depend on Fed’s signals. If Powell sounds somewhat dovish, U.S. dollar bulls may rush to take profits off the table. In this scenario, U.S. Dollar Index may quickly move below the 104 level and head towards the 200 MA near the 103 level. If Powell sends a hawkish signal, U.S. Dollar Index will head towards March highs near 106.

For a look at all of today’s economic events, check out our economic calendar.