US dollar sitting tight at critical resistance ahead of FOMC dropping top of the hour

The US dollar came under pressure on Wednesday but has since picked up a bid again as the countdown to the FOMC moves into the final hour where another 75 bp hike is expected. The FOMC will release its policy statement at 1800 GMT. Markets will look to any hints that the Federal reserve is moderating in the response to inflation. 

At the time of writing, DXY, an index that measures the greenback vs. a basket of major currencies was back to flat on the day having recovered from a low of 111.084 and recently marking a high of 111.598.

While the focus will be on the press conference where Chair Jerome Powell will be expected to maintain the hawkish tone that he has consistently held since Jackson Hole in late August, there are risks of a variant of a 100bps hike or a lesser 50bp which will come as a surprise. Additionally, the statement will be important in any outcomes and variants surrounding a 75bps hike. In a prior commentary, Powell suggested that hikes may not continue at their present pace, but if he were to switch that up and suggest that another 75bp rate hike in December is possible as inflation remains stubbornly high, the dollar could fly as investors start to price in a higher terminal rate. For the December meeting, the futures market is split on the odds of a 75- or 50-bps increase

However, analysts at Brown Brothers Harriman argued that he will give the markets what they are looking for, which is some hint of a pivot. In such a dovish outcome, Powell could suggest that another 75bp hike in December may not be necessary due to significant front-loading that has already taken place. This would suggest to markets that the central bank is nearing a policy peak and that inflation should begin to moderate relatively soon. The dollar would be presumed to come under pressure on such dovishness while risk markets, such as stocks and high better currencies would rally.

DXY technical analysis

The weekly chart is pointing to a higher US dollar, but 111.50 needs to be cleared:

From a daily perspective, the index has dipped below the trendline, but not for the first time: 

We can paint the trendline with a broad brush, but what is significant is the horizontal resistance between 111.47 and 112.52. This Fed meeting could be make or break in this respect. If the price failed to get through here once the decision is digested over the rest of the week, then that would indicate we could be in for prolonged softness in the greenback and entirely data-dependent until the December meeting.