The U.S. Dollar tumbled on Wednesday after signs of sharply decelerating U.S. inflation prompted bets that the Federal Reserve would raise interest rates at a slower pace than previously expected.
Treasury yields mostly pulled back from an earlier plunge as investors digested data showing that consumer prices did not rise in July as the cost of gasoline fell, delivering the first notable sign of relief for Americans who have watched inflation soar over the past two years, Reuters wrote.
At the end of the session, traders had priced in a 57.5% chance of a 50 basis point rate hike next month, and a 42.5% chance of a 75 basis point rate hike. Before the inflation report, traders had priced in a 64.5% chance of a super-sized 75 basis point rate hike.
On Wednesday, September U.S. Dollar Index futures settled at 105.080, down 1.1720 or -1.12%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) finished at $28.13, down $0.30 or -1.07%.
Hawkish Fed Officials Stop Price Slide
Following a test of its lowest level since July 1 at 104.515, the dollar index bounced back into the close after a couple of Fed officials spoke of the need to continue to raise interest rates.
Minneapolis Fed Bank President Neel Kashkari said that he continues to believe that the U.S central bank will need to raise its policy rate to 3.9% by year-end to 4.4% by the end of 2023 to fight inflation.
Chicago Fed President Charles Evans remained more hawkish than financial markets, expecting that U.S. rates will top out at 4% next year.
Daily Swing Chart Technical Analysis
The main trend is down according to the daily swing chart. A trade through 104.515 will re-establish the downtrend. A move through 106.810 will change the main trend to up.
The main range is 101.170 to 109.140. The market is currently testing its retracement zone at 105.155 to 104.215. This zone may have stopped the selling at 104.515 on Wednesday.
The intermediate range is 103.200 to 109.140. The index is trading below its retracement zone at 105.480 to 106.181, making it resistance.
The short-term range is 109.140 to 104.515. Its 50% level at 106.830 is additional resistance.
Trader reaction to the main 50% level at 105.155 is likely to determine the direction of the September U.S. Dollar Index early Thursday.
A sustained move over 105.155 will indicate the presence of buyers. The first upside target is 105.480. Overcoming this level could trigger an acceleration into 106.180.
A sustained move under 105.155 will signal the presence of sellers. If this creates enough downside momentum then look for the selling to possibly extend into Wednesday’s low at 104.515, followed by the main Fibonacci level at 104.215. This price is a potential trigger point for an acceleration to the downside.