The U.S. dollar strengthened on Monday after the Federal Reserve's hawkish stance on inflation led investors to anticipate further interest rate increases. According to the CME Group's FedWatch tool, the probability of a 0.25% hike in the target range for the federal funds rate in October rose to approximately 56%, up from 43.5% the previous Wednesday.
St. Louis Fed President Alberto Musalem stated on Monday that he expects inflation to remain above the central bank's target for a prolonged period, making further policy rate increases appropriate. The Federal Reserve's latest projections indicate that the policy rate will be increased in December. While declining oil prices and Treasury yields have eased some concerns about energy supply, the U.S. dollar has appreciated against a group of peer currencies over recent weeks, with expectations that U.S. yields will continue to rise.
The euro faces fewer near-term catalysts for strength. Although the European Central Bank raised rates in July, officials have recently advised against over-interpreting energy price increases as a signal for larger rate hikes. Falling energy prices are expected to ease inflation, supporting the case for no further rate increases from the ECB.
In contrast, the British pound has stronger fundamental support. The Bank of England held rates at 3.75% last week but indicated it could raise rates if energy supply disruption from the Middle East persists. Three-month inflation swaps suggest a 65% probability of a rate increase in November and imply the bank could raise rates by an additional 1.25 percentage points by the end of 2027. Recent economic data, including higher-than-expected July GDP growth and increased August retail sales, also supports the case for higher interest rates.
Technical indicators show mixed signals for the U.S. Dollar Index, which is trading at 100.45. The index remains above a rising trendline and recent support at 100.33, levels that continue to delineate support. The next major resistance is at 100.53; a breakout above this level would target 100.68 and 100.83. Conversely, a move below 100.19 would negate the bullish outlook, with further support found at 100.04 and 99.89.
The GBP/USD pair is trading at 1.3372, consolidating above the 1.3365 support level on the two-hour timeframe. Price action remains below the 200 and 100-hour moving averages and a descending trendline, though a series of higher lows from 1.3336 suggests bears have lost momentum. A break above the 1.3405 resistance level would open higher targets, while failure to hold 1.3365 could lead to tests of 1.3336 and 1.3307.
EUR/USD is trading at 1.1461, hovering near the 1.1478 resistance level that has capped recent upside moves. The pair remains below both the 20 and 100-hour moving averages and a descending trendline, maintaining a bearish bias. Support is located at 1.1457, followed by 1.1444 and 1.1430. A break above the 1.1502 resistance level is required to shift the outlook to bullish.