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USD Price Bounce Possible, Dovish Rate Hike Already Priced In

USD Price Bounce Possible, Dovish Rate Hike Already Priced In

Martin Essex, MSTA, Analyst

USD price, news and analysis:

  • The USD price, as measured by the DXY index, has now fallen for three successive sessions on suggestions that the Federal Reserve will raise US interest rates today but accompany the announcement with a dovish statement.
  • That suggests a risk that the Dollar will rally, with a ‘dovish rate hike’ already fully priced in.

USD price ready to bounce after recent weakness

The US Dollar, as measured by the DXY index that plots its progress against a basket of other currencies, could be due a bounce even if the Federal Reserve accompanies a quarter point increase in US interest rates later today with a more dovish commentary.

The Fed looks almost certain to increase rates by a quarter of a percentage point to 2.25%-2.50%, with the CME FedWatch tool implying a 71.5% chance of that happening. However, there has been talk in the markets for days now that the Fed will drop its previous reference to “further gradual increases” in the target range for the Federal funds rate.

The so-called “dot plot” that shows where Fed officials expect rates to be in future is also widely expected to be revised to show fewer increases and this has all led to a softer USD.

USD Price (DXY) Chart, Daily Timeframe (September 24 – December 19, 2018)

Latest US Dollar index price chart.

Chart by IG (You can click on it for a larger image)

The risk is now therefore that the USD will bounce as the possibility of a US government shutdown by President Donald Trump recedes and the Fed stands up to calls by Trump for it to stop raising rates. The CME FedWatch tool is already showing a 46.7% probability that the Fed funds target rate will be raised no further next year so if Fed officials continue to price in further increases that too should boost USD.

US Treasury yields also due a bounce

Meanwhile, the yield on 10-year US Treasury notes looks well placed to bounce too after reaching its lowest level since May and that should also provide some support for the currency.

US Treasury 10-Year Note Yield, Daily Timeframe (May 14 – December 19, 2018)

Latest US Treasury note yield chart.


More to read:

US Dollar: What Every Trader Needs to Know

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--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at or on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.