US Dollar loses traction, drops towards mid-91s as investors step back ahead of FOMC

Eren Sengezer FXStreet

Following a failed attempt to stay above the 92 handle on Monday, the US Dollar Index is recording modest losses on Tuesday as investors are gearing up for the Federal Reserve’s Open Market Committee (FOMC) meeting that began today and will end tomorrow in the second half of the NA session tomorrow. As of writing, the index was at 91.58, down 0.25% on the day.

Earlier in the session, the mixed macro data from the U.S. triggered a USD sell-off. However, it didn't take long for the DXY to gain traction and advance to a fresh session peak at 91.83 on the back of rising Treasury-bond yields in the U.S. The 10-year reference reached its highest level since August 17 at 2.245% on Tuesday and was last seen moving sideways around %2.24.

Investors will be looking for hints in the FOMC statement that could shape the expectations for another 25 basis points rate hike before the end of the year. The CME Group FedWatch Tool is showing that markets are pricing a 56% probability of a December rate hike. A hawkish Fed could allow the greenback to make a stronger recovery compared to the technical one we have seen last week.

"We expect the Fed to announce the start of its balance sheet normalization program but we do not expect them to raise rates and we do not expect them to do so later in the year either. That said, USD is arguably more sensitive to the political environment than Fed policy at the moment and in this respect, tax reform remains the key to currency performance and poses a significant risk to USD crosses," Rabobank analysts wrote in a recent report.

FOMC Preview: there's nothing the Fed can do to save the greenback

Technical levels to consider:

92 (psychological level) remains as a significant threshold for the index. With a decisive move above that level, the index could aim for 92.65 (Sep. 14 high) and 93.30 (Aug. 31 high). On the downside, supports could be seen at 91.40 (Sep. 11 low), 91 (Sep. 8 low) and 90 (psychological level).

Today's data from the U.S.:

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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