Dollar regains control after Fed pause: Bullish scenario on-point, more upside ahead?

Dollar strength gains traction

The U.S. Dollar Index extended its rebound this week, building on momentum that began after last week's softer inflation data and the Fed's steady tone. While the Federal Reserve left interest rates unchanged as widely expected the market reaction was far from neutral.

Despite dovish undercurrents in the CPI and PPI prints, the Fed’s dot plot hinted at a more cautious approach to cutting rates, with Chair Powell emphasizing the need for “greater confidence” in disinflation before pivoting. This firm stance has supported a modest dollar bid across the majors.

Why the Fed is still hawkish

• The Fed held rates steady, but only projects one rate cut in 2025 (down from 2-3 earlier this year).
• Powell emphasized the need for “greater confidence” in disinflation before easing.
• Services inflation remains sticky, and the Fed is wary of cutting too soon.
• The dot plot and tone show they’re not rushing to ease, especially with the labor market still resilient.

But not aggressively hawkish either

• Inflation is cooling (as seen in CPI and PPI).
• Powell acknowledged progress toward the inflation goal.
• Market expectations are still pricing a potential cut by September, although not guaranteed.

Conclusion

The Fed is in a "hawkish hold" mode:

• They’re not raising rates, but also not ready to cut quickly.
• The stance is data-dependent - leaning hawkish until inflation clearly aligns with their 2% target.

Bullish scenario on point

Previously, I have outlined in my latest analysis, Dollar struggles near three-year lows ahead of FOMC: What It means for the majors, the bullish and bearish scenario that could set dollar’s trajectory post-Fed rate policy decision.

Either we push to the upside with a hawkish stance:

Or push down lower with a dovish stance + resistance level coupled with the Daily FVG:

Technical breakdown: Daily FVG reclaimed

The bullish scenario is now in motion, with price making a clean break above the reclaimed 4-Hour FVG and pushing past the prior highs.

• Fair Value Gap (FVG) Retest & Breakout
• Price reclaimed and respected the new 4-hour bullish FVG (highlighted in green), nested inside the Daily FVG that acted as support after being invalidated.

What this means for the Dollar

The dollar is showing strength in alignment with fundamental backing (hawkish Fed hold).

Bullish case: Target at 99.392 could push Dollar recovery

• 4-Hour FVG resting between 98.536 - 98.745 holds.
• Last line of defense before risk increases is 98.50 level.

Bearish case: Breakdown below Fed candle could pull Dollar deeper

• Breakdown below this range 98.536 - 98.745.
• Break below the hawkish candle.
• 98 level breakdown.

The path of least resistance is still up for the dollar, and most majors are aligned for USD continuation trades, unless upcoming data shifts the tone.

With the dollar gaining traction:

• Look for trades in favor for USD.
• Lessen risk on trading in favor of foreign pairs unless USD pulls back.