DXY holds at $101.54 as rate divergence drives dollar higher

Sticky US inflation and a cautious Federal Reserve are keeping the dollar bid intact, pushing the DXY index to $101.54 as the ECB and BoE grapple with weaker growth that limits their currencies' appeal.

"Policy divergence is fueling two-way flows as markets price in a more restrictive US rate setting remaining in place for longer," said Arslan, a finance MBA and MPhil in behavioral finance who specializes in market sentiment analysis.

The DXY index bounced off the $97.67 wave low and is now testing the $100.36 triangle resistance breakout level, which has flipped to support. The daily RSI sits above 55, confirming bullish momentum, with the next target at $103.09 in the coming weeks, according to the analysis. EUR/USD fell to $1.1362, testing a major demand zone between $1.1406 and $1.1450, with sellers maintaining control as the daily RSI holds near 45. GBP/USD traded at $1.3169, finding support near the $1.3109 channel floor after rejection at the 50-period moving average around $1.3320.

The divergence matters because it determines the direction of capital flows across the $7.5 trillion-a-day foreign exchange market. If the DXY holds above $100.36, the path to $103.09 opens, further pressuring the euro and sterling. A break below that level, however, would signal dollar exhaustion and potentially trigger a reversal into risk assets. Thursday's US PCE report and any shift in Fed language will provide the next test for the dollar.

The dollar's strength reflects a fundamental disconnect in the global rate cycle. US core inflation remains sticky enough to keep the Fed from signaling any near-term easing, while strong domestic economic activity and the dollar's reserve-currency status continue to attract demand. The last time the DXY traded at these levels relative to the euro was in early 2025, when the Fed held rates steady while the ECB cut its deposit rate by 25 basis points to support flagging growth.

For sterling, the BoE faces a more complex trade-off. Services inflation remains elevated, limiting the central bank's ability to ease, but softer growth data is building pressure for rate relief. Domestic fiscal policy and labor market data will be the key drivers for sterling, along with the relative policy stance versus the Fed and ECB for cross-rates. The pound's 2.5 percent decline from its June high near $1.3320 reflects the market pricing in a greater chance of BoE easing before year-end.

EUR/USD tests demand zone as sellers hold control

On the daily chart, EUR/USD is trading at $1.1362 after a steep decline from the $1.1927 wave high. The sequence of lower highs confirms sellers remain in control, though the pair is finding support in the major demand zone near $1.1406. The daily RSI at 45 is consistent with a bearish trend, and the volume profile suggests the $1.1406-to-$1.1450 area will be tested as support. Resistance sits near the descending trendline at $1.1620. A break below $1.1300 would open the door to further losses, with the next floor at the $1.1200 psychological level.

GBP/USD holds channel support as buyers step in

GBP/USD is trading at $1.3169 after rejection at the 50-period moving average near $1.3320. Mixed candles are attempting to find support in the channel area near $1.3109, with rejection wicks suggesting buyers are stepping in. The 4-hour RSI around the 50 area points to a neutral trend. The volume profile indicates positive price response in the $1.3100-to-$1.3160 range, with resistance expected between $1.3270 and $1.3320. A break above $1.3320 would target the $1.3400 area, while a move below $1.3109 could accelerate losses toward $1.3000.

This article is for informational purposes only and does not constitute investment advice.