US Dollar Index outlook: Regains traction after post-Fed drop as worsening geopolitical situation

US Dollar Index

The dollar regained traction in early Thursday trading and recovered part of Wednesday’s post-Fed 0.6% drop, which pushed the US currency to the lowest since July 20.

The US central bank left rates unchanged at 3.50%/3.75% range as widely expected, but policymakers were split in policy view that deepens uncertainty over Fed’s next steps.

Although the Fed sticks to its rhetoric about closely watching developments and acting accordingly, markets keep high bets for September rate hike (with one more hike by the end of the year, not ruled out) that continues to underpin the dollar.

The latest escalation in the Middle East and signals that conflict may deepen and widen by more countries in the region being engulfed, will continue to fuel inflation (prolonged oil supply disruption would cause domino-effect) and increase pressure on the Fed for further policy tightening.

From that perspective we can see the sharp drop in past two days as a healthy correction (despite that bull-trendline off 97.40 higher base has been violated again, likely for another false break lower).

Technical picture on daily chart remains predominantly bullish and contribute to scenario of deeper correction (still within the limits) as positioning for fresh push higher.

Ascending and thickening daily Ichimoku cloud continues to underpin near-term action, with momentum studies being in neutral to positive mode.

Break and close above 20DMA (100.83) is seen as minimum requirement to validate initial positive signal, with return above bull-trendline (100.98, reinforced by 10DMA) to bring bulls back to play and shift focus on recent peaks at 100.48/55).

Larger bulls are expected to remain active if the price holds above 100 support zone.

Res: 100.98; 101.48; 101.55; 102.00.
Sup: 100.58; 100.22; 100.00; 99.48.