US Dollar Price Forecast: Sticky Inflation Lifts DXY as EUR/USD and GBP/USD Pull Back

On August 27, the U.S. dollar opened with increased buying activity, following a slightly hotter-than-expected July inflation report. The PCE price index rose 0.2% month over month and 3.7% year over year, surpassing the anticipated 3.6% annual increase. Core PCE also increased 0.2%, staying at 3.3%, which has fueled expectations of a September Fed rate hike.

However, a rate hold remains more probable. Market participants await clarity on Fed Chair Kevin Warsh's Jackson Hole speech to determine if persistent inflation outweighs weaker consumer and labor market signals. The euro's performance is comparatively stronger due to the ECB's inflation challenges. Recent Eurozone data indicated business activity growth, and despite ongoing energy costs and supply disruptions, the path to the ECB's 2% inflation goal is beginning to materialize.

This has led to expectations of further tightening measures to address inflationary pressures. Nevertheless, the still high inflation environment poses a clear concern for the Bank of England, maintaining it in a demand fallacy. Reports from Reuters suggested that recent movements in the British pound were driven by expectations of U.S. policy rather than domestic factors.

On the FX front, the main theme for August 27 was a slight uptick in the risk of Fed hikes due to sticky PCE. However, steady expectations for European rate hikes continue to dominate. Dollar traders are focusing on Warsh's Jackson Hole remarks, while the euro and pound remain sensitive to the ability of their respective central banks to maintain policies amid growth limitations.

Currently, the DXY is trading at 99.14 on the 4-hour chart, having rebounded from the 98.56 level. The DXY has recovered, yet it remains below the 100-EMA at 99.45 and is contained within the descending trendline around the 99.15 area, resulting in a bearish overall structure. The RSI stands at 56, indicating that the price has regained some value.

Resistance is currently located at 99.12-99.26, followed by areas at 99.48, 99.69, and 99.99. Support for the DXY is found at 98.99, 98.82, 98.56, and 98.33. Analysts believe the DXY is attempting to form a corrective rebound, which will remain below the 99.26 and 99.48 levels. A break above these areas would allow the price to test the 99.69 level.

If the DXY starts trading below the descending trendline, it could retest the 98.82 and 98.56 areas. For GBP/USD, the pair opened at 1.3588 and retreated from the 1.3656-1.3676 resistance zone on the 4-hour chart. It is testing the lower boundary of the rising channel at 1.3597 and is trading below the 50 EMA at 1.3554. The 100 EMA is at 1.3554, suggesting positive price action, but the latest downward movement has weakened short-term momentum.

The RSI is at 39, indicating a negative slope for price and control resistance in the 1.3565 zone. If the pair continues to decline, support can be expected at the 1.3526 and 1.3481 zones, while resistance lies at the 1.3598, 1.3656-1.3676, and 1.3707 zones. The GBP/USD price action is at a critical juncture, with trading above 1.3565 and the rising channel likely leading to a recovery toward 1.3656.

Conversely, falling below 1.3565 would signal a negative development, potentially driving the pair to the 1.3526 and 1.3481 support zones. EUR/USD is currently trading at 1.1656 after correcting from the 1.1711 area. The pair has traded above the 50-EMA at 1.1641 and the 100-EMA at 1.1600, indicating a bullish overall structure.

EUR/USD has been contained within an ascending channel over the past few trading sessions without breaching the upper boundaries. The RSI is at 49, signaling neutral territory after an overbought zone earlier. EUR/USD is supported at 1.1641, 1.1624, and 1.1600, while resistance may emerge at 1.1658, 1.1678, 1.1711, 1.1733, and 1.1751.

It is believed that EUR/USD remains bullish as long as it stays above 1.1641, with potential for further gains up to 1.1678 and possibly even 1.1711. A breach below 1.1641 would be bearish, likely taking the pair back to the 1.1624 and 1.1600 support zones.