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

The US Dollar Index (DXY) dipped slightly from a recent two-week peak, hovering just above 99.50 as of Wednesday morning, before stabilizing. Market participants are eagerly anticipating the Federal Open Market Committee's (FOMC) decision, scheduled for September 15-16, where a 25 basis point (bps) interest rate hike is anticipated, marking the first increase in three years.

Traders will also be observing Federal Reserve Chair Kevin Warsh's remarks during the post-meeting press conference to glean additional insights into the central bank's future policy trajectory. The broader economic outlook will be pivotal in guiding the direction of the DXY's next move.

In the run-up to this crucial central bank meeting, concerns over energy-related inflation loom large, bolstering expectations for further rate hikes by the Fed. This inflationary backdrop, coupled with a surge in both private and public borrowing, has spurred a wave of global bond selling, driving the yield on the 10-year US Treasury bond past the 5% mark for the first time since 2023 and reaching its highest level since 2007.

Heightened tensions in the Middle East are also providing a boost to the safe-haven status of the US Dollar. Saudi Arabia has issued security alerts across several regions, including the holy city of Mecca and Jeddah, following a series of attacks attributed to Iran-aligned Houthis. The Saudi-led coalition has vowed a robust response to any retaliatory strikes from the Houthi group, maintaining a high level of geopolitical risk that could impede any significant correction in the DXY.

Technical analysis suggests that the DXY is currently constrained between the 99.75-99.80 region, which includes the 100-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level. A daily close above this range could propel the index towards the 50.0% retracement at 100.08 and the 61.8% level at 100.45. Subsequent milestones would include the 78.6% retracement at 100.96 and the recent swing high near 101.62.

Conversely, a breach of the 23.6% Fibonacci retracement around 99.27 could pave the way for a fall towards the broader structural support at 98.55.