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Talking Points:

- The US Dollar has declined throughout September, even as pricing of the Fed’s rate hike timeline as become more aggressive.

- 25-bps hikes are being priced-in for September and December 2018, but then no rate move is anticipated until at least June 2019.

- See the full DailyFX Webinar Calendar for upcoming strategy sessions.

Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.

The US Dollar has been on a skid over the past few weeks, but shifting expectations around the Federal Reserve’s rate hike path have had little say in the matter. In September, the US Dollar (via the DXY Index) is down -1.15%, but since its high in mid-August, the greenback as fallen by just over -3% versus its major counterparts.

Yet during this time period, we’ve seen rate hike odds firm up, both in the short- and medium-term time horizons. Over the past six weeks, since the DXY Index high on August 15, rate hike odds for the September FOMC meeting have increased from 92% to 100%. Similarly, odds for a hike at the December meeting have increased 67% to 76%.

Federal Reserve Rate Hike Expectations (September 18, 2018) (Table 1)

Central Bank Weekly: US Dollar has Next Week's Fed Hike Priced In

We’ve previously argued that the US Dollar decoupling from rate hike odds is bad news for the US Dollar. The reasoning remains in place: with two hikes already priced in for the rest of the year, this may be ‘as good as it gets’ for the greenback. The fundamental backdrop for the US Dollar is strong now – the economy is whirring along at +4% annualized growth, jobless claims are at their lowest rate since the 1960s, and the deficit-boosting Trump tax plan is still working its way through – but it doesn’t seem like conditions can get any better.

DXY Index Price Chart: Daily Timeframe (January to September 2018) (Chart 1)

Central Bank Weekly: US Dollar has Next Week's Fed Hike Priced In

The breakdown in price the past few days has increased the credibility of the bear case for the US Dollar. The DXY Index is in the midst of breaking significant near-term support that has held up since the end of August. Price is extending its losses below its daily 8-, 13-, and 21-EMA envelope, while both daily MACD and Slow Stochastics are continuing to move lower in bearish territory. A daily close below the late-August swing lows around 94.43 would confirm a downgrade in the US Dollar's near-term outlook from 'neutral' to 'bearish.'

Read more: DXY Index Lingers Near August Swing Lows for Fifth Day

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX