US Dollar Index looks set to refresh 20-year high above 110.00 on hawkish Fed bets

• US Dollar Index grinds higher around multi-year top after rising the most in a week.
• Strong yields, geopolitical fears underpin the US dollar’s run-up.
• Chatters over a surprise 1.0% rate hike also favor bullish momentum.
• Two-month-old resistance line gains attention as 21-DMA restricts short-term downside.

US Dollar Index (DXY) gears up for another hawkish play of the Fed during Wednesday, taking rounds to 110.30 after rising the most in a week to the recently flashed two-decade high the previous day. In addition to the pre-Fed anxiety and the hawkish calls for the US central bank decision, geopolitical headlines and strong yields also underpin the strength of the greenback gauge versus the six major currencies.

“The Fed started a two-day meeting on Tuesday, with rate futures traders pricing in an 83% chance of a 75 basis-point hike and a 17% probability of a 100 bps of tightening,” said Reuters. The news joins increasing calls for a positive surprise to add strength to the DXY. The global economist Nouriel Roubini joined the league of supporters for the Fed’s 1.0% rate hike and favored the US dollar bulls.

A snap lockdown in the steel hub of Tangshan, due to China’s zero covid policy, recently challenged the market sentiment and strengthened the US dollar’s safe-haven demand. On the same line could be the news suggesting US Senators’ demand for secondary sanctions on Russian oil.

Previously, mostly upbeat US housing data seemed to have propelled the yields to favor DXY bulls. The nine-month downtrend in the US NAHB Housing Market Index precedes the Building Permits to 1.517M in August versus 1.61M forecast and 1.685M prior. However, Housing Starts improved to 1.575M compared to 1.445M market consensus and 1.404M previous readings.

It should be noted that the US 2-year Treasury yields jumped to the highest level in 15 years while the 10-year counterpart also rose to the 11-year top during the pre-Fed cautious mood. With this, the Wall Street benchmarks closed in the red while the S&P 500 Futures remain indecisive at the latest.

Looking forward, the second-tier US housing data may entertain DXY traders but major attention will be given to the Federal Open Market Committee (FOMC) showdown as 0.75% rate hike is already priced-in. In addition to the rate moves, the economic forecasts and Fed Chair Powell’s speech will also be crucial for clear directions.

Also read: Federal Reserve Preview: Forecasting 5% interest rates? Dollar to move on dot-plot, Powell's pledges

Technical analysis

A clear rebound from the 21-DMA, around 109.40, directs the DXY towards an upward sloping resistance line from July 14, close to 111.20 at the latest.