United States Dollar Index (DXY) eases from two-week top, holds above 99.50 ahead of Fed

• DXY eases from a two-week high as bulls turn cautious ahead of the key Fed rate decision.
• Fed rate hike bets and inflation concerns keep US bond yields elevated, supporting the USD.
• Escalating tensions in the Middle East further act as a tailwind for the safe-haven Greenback.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, retreats slightly from a two-week high, retested earlier this Wednesday, though it lacks follow-through selling. The index flatlines above mid-99.00s during the early European session as traders keenly await the outcome of the crucial FOMC decision.

The US Federal Reserve (Fed) is widely expected to raise interest rates by 25 basis points (bps) at the conclusion of the September 15-16 meeting, which would mark the first hike in three years. Meanwhile, traders will scrutinize updated economic projections and Fed Chair Kevin Warsh's comments during the post-meeting press conference for more cues about the future policy path. The outlook, in turn, will play a key role in determining the next leg of a directional move for the DXY.

Heading into the key central bank event, energy-driven inflation risks underpin prospects for further policy tightening by the Fed. This, along with a surge in public and corporate borrowing, led to an extended global bond selloff, which lifted the yield on the benchmark 10-year US Treasury bond beyond the 5% threshold for the first time since 2023 and to its highest level since 2007. Adding to this, escalating Middle East tensions continue to act as a tailwind for the safe-haven Greenback.

In the latest developments, Saudi Arabia issued security alerts over a range of territory – including in the holy city of Mecca and the second-largest city, Jeddah – following a week of attacks from Iran-aligned Houthis in Yemen. Meanwhile, the Saudi-led coalition has promised to respond firmly to missile and drone strikes by the Houthi group. This keeps the geopolitical risk premium in play, suggesting that any corrective pullback in the DXY is likely to be bought into and remain limited.

DXY daily chart

Technical Analysis

The near-term tone remains capped, as the DXY holds beneath the 99.75-99.80 confluence – comprising the 100-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement. A daily close above this would open the way toward the 50.0% retracement at 100.08 and the 61.8% level at 100.45, with the 78.6% retracement at 100.96 and the recent swing high near 101.62 acting as subsequent hurdles.

On the downside, initial support emerges at the 23.6% Fibo. retracement around 99.27, ahead of the structural floor near 98.55, where buyers would be expected to defend the broader range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)