US DOLLAR, DXY, FED, FOMC MEETING- OUTLOOK:

• USD rally has consolidated ahead of next week’s FOMC meeting.
• US exceptionalism continues to broadly support USD.

The US dollar’s rally has stalled ahead of the Oct. 31-Nov.1 FOMC meeting. Part of the reason for the consolation is dovish rhetoric from Fed officials earlier this month, pointing out that tightening in financial conditions as a result of the jump in yields has reduced the need for imminent tightening. As a result, markets widely expect the Fed to hold rates next week.

US Fed chair Powell, while acknowledging the tightening in financial conditions recently, left the door open for higher rates. For more details, see “US Dollar Outlook After Powell: GBP/USD, AUD/USD, EUR/USD Price Action,” published October 20. Furthermore, solid US economic data and the perception of higher for longer rates have triggered a pushback in rate cuts in 2025.

Having said that, for the recent consolidation to turn out into a reversal, US exceptionalism – the outperformance of the US economy relative to the rest of the world and a broadly hawkish Fed -- would need to reverse.Until then, it could be premature to conclude that the USD has peaked.

DXY Index Daily Chart

Chart Created by Manish Jaradi Using TradingView

DXY Index: An inflection point?

On price charts, the US dollar index’s rally appears to be stretched. Market diversity, as measured by fractal dimensions, appears to be low as the DXY Index hit a multi-month high earlier this month. Fractal dimensions measure the distribution of diversity. When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of at least a pause or even a price reversal.

For the DXY Index, recently the 65-day fractal dimension fell below the threshold of 1.25, flashing a red flag, pointing to a consolidation/minor retreat at the very least. For more discussion, see “Has the US Dollar Rally Hit Limits? DXY Index Fractals, Price Action,” published October 17.

DXY Index Daily Chart

Chart Created by Manish Jaradi Using TradingView

Having said that, until there is a price confirmation, the path of least resistance remains sideways to up in the interim. For the immediate upward pressure to ease, the index would need to fall below support at the mid-October low of 105.50. For a reversal of the uptrend since July, the index would need to fall below the 200-day moving average (now at 103.25), near the lower edge of the Ichimoku cloud on the daily charts.

EUR/USD 240-Minute Chart

Chart Created by Manish Jaradi Using TradingView

EUR/USD: Minor reverse head & shoulders?

EUR/USD’s slide appears to be temporarily stalled at vital support at the January low of 1.0480.

The recent base-building appears to be a minor reverse head & shoulders (the left shoulder is at the end-September low, the head is at the early-October low, and the right shoulder is at the mid-October low). A cross above 1.0650-1.0700 could open the door toward 1.0800, near the 200-day moving average.

https://www.dailyfx.com/news/us-dollar-forecast-could-the-fed-be-the-catalyst-for-a-correction-20231029.html