If the central bank prefers a more cautious decision, USD bulls would be disappointed

The US dollar extended the recent ascent to fresh two-decade highs around 105.65 to finish around 105.30 on Tuesday. Today, the USD index keeps retreating from peaks as traders take some profit ahead of the Fed policy decision due later in the day.  

The greenback is also pressured by the rallying euro, with EURUSD targeting the 1.0500 mark on the news that the ECB is holding an emergency meeting to discuss the recent sell-off in the bond market. Should the shared currency exceed this immediate barrier, further gains could lie ahead in the short term.

Meanwhile, the Federal Reserve is expected to raise rates by 50 basis points today. Of note, many market participants also bet on a more aggressive hike (75 bps), so if the central bank prefers a more cautious decision, USD bulls would be disappointed. In this scenario, the buck could get back below the 104.00 mark. As of writing, the dollar index was changing hands around 104.80, down 0.66% on the day. In a wider picture, however, the American currency stays resilient and could continue to outperform its counterparts if the US economy avoids recession amid elevated inflation. Should the Fed announce a 75 bps hike, the USD index may rally towards fresh multi-year highs around 106.00, followed by a major threshold of 107.00. Still, the dollar’s knee-jerk reaction may not be positive, especially as the Fed may fall short of market expectations in the context of economic projections or/and the so-called dot plots. Anyway, a possible downside correction should be short-lived, considering rising Treasury yields and stocks in bear-market territory.


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