The U.S. Dollar's Long Slide May Finally Be Ending as the Fed Digs In

The U.S. dollar's multi-year decline is driven by the long arc of Federal Reserve policy expectations, and that arc may finally be bending. After years of grinding lower, the U.S. dollar has posted its first weekly close above the top of a multi-year downtrend, the clearest sign yet that its long slide could be ending. What decides whether the turn sticks is not the trendline itself but the rate path the Federal Reserve signals at its looming policy meeting. That makes the coming decision a genuine inflection point for the currency.

Michael Boutros is a Senior Market Analyst at FOREX.com who has traded foreign exchange, commodities and equity indices for more than 20 years and analyzes markets through a structured, multi time frame technical lens. He follows the U.S. dollar and the macro events that move it, which places the currency's long cycles and the Federal Reserve calendar squarely within what he covers.

Key Themes

• The U.S. dollar has cleared the top of a multi year downtrend for the first time on a weekly closing basis.
• A weekly bearish divergence is forming, with the dollar index at a higher high while momentum fails to confirm.
• The Federal Reserve decision under Kevin Warsh is the catalyst for the breakout, with markets pricing a possible rate hike.

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U.S. Dollar Clears a Multi Year Downtrend as Momentum Fades

The U.S. dollar has broken above the ceiling of a multi year downtrend, marking its first weekly close above that trendline in years. The move looks convincing on price, yet the weekly chart is flashing a warning underneath it, a case of "price action making a higher high and the oscillator failing to confirm that high" [1:04], Boutros said, describing a classic bearish divergence. As a result, the breakout could be running on fading fuel even as price makes new highs, a signal that a stall may be near. For the U.S. dollar, the multi year downtrend is not yet conclusively broken, and the next few sessions will decide whether the move extends or fails.

Federal Reserve Policy Now Steers the Dollar's Next Move

The Federal Reserve decision is now the decisive driver of the U.S. dollar's direction, with a two day meeting set to resolve the breakout. Markets are leaning toward no change while still pricing a real chance of a rate hike, an unusually open outcome for a Federal Reserve meeting, and new Chair Kevin Warsh has signaled a leaner approach to communication with no updated projections due. That leaves the dollar hostage to tone rather than numbers. "Markets will be picking and parsing every single word to try to gauge where the committee stands as it pertains to inflation" [4:15], Boutros explained.

Frequently Asked Questions

Why are markets still pricing a Federal Reserve rate hike?

Markets are assigning meaningful odds to a Federal Reserve rate hike, an unusual stance heading into a meeting where a hold is normally the base case. Boutros notes that the outcome is open enough that a hold is not fully priced, and attention has already shifted to the September meeting, where the probability of a hike is higher. That keeps every incoming inflation reading squarely in focus for the U.S. dollar.

What role do inflation and oil prices play in the U.S. dollar's direction?

Inflation is the pivot for the U.S. dollar, because it shapes how far and how fast the Federal Reserve can move on interest rates. Oil prices have eased after a near term de-escalation with Iran, which takes some pressure off headline inflation. Even so, core gauges such as the Consumer Price Index and the Personal Consumption Expenditures index have not yet turned decisively lower, leaving both the inflation picture and the dollar unresolved.

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--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: Michael Boutros, FOREX.com Senior Market Analyst