US Dollar Rallies on Hawkish Fed Hike, Though Upside Could be Limited

The US dollar surged after the Fed delivered a hawkish rate hike and signalled scope for another move this year. DXY has pushed into 100 as momentum shifted firmly in favour of dollar bulls, weighing on EUR/USD, GBP/USD and AUD/USD. Yet despite the near-term strength, I continue to view the broader US dollar rebound as corrective and suspect the year's high is already in.

 

 

US Dollar Rallies as Fed Signals Further Tightening

The Fed’s unanimous decision to hike interest rates helped the US dollar deliver its best daily performance in three months. While the hawkish hike effectively signalled another 25bp move by December, it remains up for debate whether the Fed will hike again in 2027.

This marks the Fed’s first hike since July 2023, though I am not convinced it will match the initial magnitude of its last tightening cycle. In 2022, the Fed hiked by 150bp over its first three meetings, eventually raising rates by 525bp across 11 hikes. Yet after a single hike this time around, it is already up for debate whether the Fed will hike more than once, while markets are only cautiously pricing further tightening next year.

Source: federal Reserve, LSEG

 

Fed Forecasts Signal Another Hike, but 2027 Remains Uncertain

Kevin Warsh avoided strong forward guidance, which is not too much of a surprise given he is caught between a rock and a hard political place. President Trump calling for cuts while economic data and persistent inflation are pushing the Fed in the opposite direction. So it always seemed unlikely to me that the Fed would be compelled to signal multiple additional hikes at this meeting, particularly when the inflation outlook remains heavily influenced by elevated crude oil prices.

The Fed funds outlook rose to 4.1%, effectively signalling another rate hike this year, with Fed funds futures roughly split between the next hike arriving in either October or December. Core PCE inflation for 2026 was upgraded to 3.4% from 3.3%, while headline PCE was also increased by 0.1 percentage point to 3.7%. The growth outlook was nudged higher while unemployment was revised lower for 2027, providing further subtle but ultimately hawkish signals within the projections.

The short-and-sweet statement noted that economic activity was “expanding at a solid pace,” that “inflation remains elevated,” and that the hike would support a “timelier return to the Committee’s 2 percent goal.”

 

Source: LSEG

 

Market Recap: US Dollar Surges as Wall Street Slips

• The US dollar index rose 0.7% to a six-week high, sending EUR/USD down to a 34-day low.
• The Swiss franc was the weakest FX major, with USD/CHF rising 0.8% to its highest level since May 2025.
• GBP/USD fell 0.8% on the combined impact of a hawkish Fed and softer-than-expected CPI, which tempered bets of an imminent BOE hike.
• USD/CAD rallied for a sixth day to within pips of my 1.4 upside target.
• USD/JPY rose for a third day in line with my upside bias, closing above 156 and stalling just beneath its 20-day EMA.
• AUD/USD is back below 0.71 for the first time in four weeks.
• Crude oil fell 3.2% around its cycle highs, and I remain on guard for a pullback after an extended run.
• The Dow Jones led Wall Street lower with a 1.2% decline, compared with a 0.4% fall for the S&P 500, while the Nasdaq was effectively flat. None of these moves were extreme, which underscores hopes that the tightening cycle may not be too aggressive.
• Gold formed a bullish outside day around 4300 support, seemingly pleased that markets are not overly aggressive with their outlook for now.

 

 

 

US Dollar Index (DXY) Technical Analysis

Momentum is certainly playing nicely for US dollar bulls, with DXY on track for a bullish engulfing week from its 50-week SMA. The weekly RSI (2) is not yet overbought and the RSI (14) is back above 50, though I continue to suspect we have already seen the high for the US dollar this year.

The Fed are not overly hawkish despite their hawkish hike, and price action on the weekly chart continues to suggest the rally from the January low is corrective.

The daily chart shows Wednesday’s high met resistance at the monthly R1 pivot, just beneath the July low. While a break higher seems more likely than not, this could also suggest the rally is stretched over the near term and provide some caution to forex traders late to the party.

Still, USD bulls may be seeking dips with the monthly R2 pivot (100.80) and 101 handle in mind. But for now, I suspect this is the last push of the rally before momentum realigns with the bearish move that began in January 2025.

Source: ICE, TradingView

 

 

US Dollar Strength Dominates Across FX Majors

The dollar has clearly dominated against safe-haven currencies this week, with USD/JPY and USD/CHF leading the gains since Monday’s open. USD/JPY could have further to climb, bit I maintain my stance that it could be headed to below 150 – but for now we need to let momentum do its thing and wait for clues of a potential swing high. USD/CHF appears to be the safer bullish bet as by shorting the Swiss franc a traders I not betting against the SNB, which is unlike being long USD/JPY and betting against the BOJ.

USD/CAD is also another pair that may favour dip buyers while GBP/USD, EUR/USD, AUD/USD and NZD/USD are prime candidates for bears to fade into rips in anticipation of new lows. But as I have eluded to above, I do not see this as the beginning of a major upswing for the US dollar, so these forex views are for the near term only.

Source: ICE, TradingView