USD forecast: Dollar gears up for next week’s Fed meeting

USD forecast: Dollar gears up for next week’s Fed meeting

On Friday, the U.S. dollar index (USDX) traded above the 105 mark, reaching its highest levels in six months on strong economic data in the United States, which sparked optimism that the Federal Reserve (Fed) could successfully engineer a “soft landing” — a slowdown in economic growth that avoids a recession — even if it continues to maintain higher interest rates for an extended period.

In August, U.S. retail sales went up by 0.6% on a month-on-month basis, surpassing the forecasted 0.2% increase. Producer prices also climbed by 0.7%, marking the most significant uptick since June 2022, and surpassing market expectations for a 0.4% rise.

Traders are still placing their bets on the Federal Reserve keeping interest rates unchanged in the upcoming week, while the central bank's next move in November remains a topic of debate.

According to CME’s FedWatch tool, the market is currently expecting a 97% probability that the Fed will maintain its target rate range within 5.25% to 5.50%. The probability of a 25 basis-point hike in early November stood at 30%, as of September 15.

The USD strengthened as the euro to dollar rate (EUR/USD) fell following the European Central Bank (ECB) decision to hike interest rates on Thursday, which many analysts believe marks the conclusion of its current tightening cycle. In contrast, the greenback weakened against the yuan, as China reported stronger-than-expected economic data for August.

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USD forecasts: Dot plot in focus, dollar on track for further gains

Markets.com Chief Market Analyst Neil Wilson shared his take on the upcoming FOMC meeting in an overview on Friday:

The Fed's dot plot is a chart that documents the projected key short-term interest rate of each Federal Reserve official. Within this plot, the dots indicate the anticipated midpoint of the federal funds rate at the conclusion of each calendar year — typically three years into the future — based on the officials' expectations regarding the evolution of the economy. The officials also include a dot representing their projection for the longer term, which signifies the "neutral rate of interest." This neutral rate is the point at which interest rates are neither stimulating nor constraining economic growth.

Each dot on the chart corresponds to a specific Federal Reserve official, ranging from Chairman Powell to board member Lael Brainard, and from New York Fed President John Williams to Chicago Fed President Charles Evans. The identities of the officials behind each dot remain anonymous, preserving the confidentiality of their individual projections.

Francesco Pesole, FX Strategist at Dutch bank ING, said that further expectations for the USD trend and the DXY index are located to the upside:

In his G10 FX Daily on September 15, Scotiabank Chief Currency Strategist Shaun Osborne wrote that the USD trend might see a correction down the line, but is nevertheless in line for nine straight weeks of uninterrupted growth:

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.