The US dollar moved higher against the major currencies as Treasury yields climbed and traders increasingly weighed the possibility that last week's Federal Reserve rate hike will not be the last.

The fundamental story starts with fresh evidence of economic momentum. The latest flash S&P Global US composite PMI jumped to 58.4 from 56.0 in August, its highest reading since July 2021. The figures come from S&P Global's preliminary survey of purchasing managers, where readings above 50 indicate month-over-month expansion. Services led the advance, manufacturing output improved, and hiring strengthened, pointing to an economy that is still moving forward. However, backlogs and supply delays also increased, while businesses reported higher input costs. Strong growth gives the Fed room to raise rates again, and continued price pressure gives it a reason to consider doing so, according to S&P Global data via MarketScreener.

Fed officials reinforce the message

Fed officials have been delivering a similar message. Richmond Fed President Tom Barkin said yesterday that inflation risks outweigh employment risks and that the economy may be firming (Richmond Fed). Boston Fed President Susan Collins supported last week's hike and said more restrictive policy is needed to bring inflation back to 2%. Chicago Fed President Austan Goolsbee has warned that strong demand may be adding to the price pressure from energy and other supply shocks.

Fed Governor Michael Barr, a voting member of the FOMC, added to that message today. He said the Fed had been “out of position” before last week's hike and that further policy adjustments will likely be needed in his base case. Growth is strong and the labor market is solid, he said, but inflation is not clearly returning to 2% quickly enough (Federal Reserve).

Rate expectations have shifted accordingly. The market now sees about a 72% chance of a hike at the October meeting, up from around 50% yesterday. That repricing helps explain the move higher in Treasury yields — and in the dollar. With the meeting still weeks away, those odds remain a moving number: every data release and Fed speech between now and then gives markets another chance to reassess. The Fed meets on October 27–28, ahead of the November elections. President Trump has called for lower rates and criticized last week's hike, a public split with the path several Fed officials have been laying out (meeting calendars and information).

Why higher yields help the dollar

For a currency trader, yields are part of the return from holding one currency instead of another. If US yields rise relative to yields elsewhere, dollar-denominated assets can become more attractive. Investors seeking that return may need to buy dollars, adding support to the currency. The dollar's direction also reaches beyond trading floors: it feeds into what US consumers pay for imported goods, how much of their overseas sales US multinationals book in dollar terms, and the price foreign buyers face for commodities quoted in dollars.

That relationship is useful, but it is not a trading signal by itself. Yields can rise while a currency pair struggles to break a technical level. At other times, the dollar can move before yields do. The news helps explain the pressure; the price action shows where buyers and sellers are actually taking control.

Technical levels in focus

That is the focus of the accompanying video, which takes a technical look at EURUSD, USDJPY, GBPUSD, USDCHF and USDCAD, identifying the levels that define the near-term bias, where traders can measure their risk, and the next targets if the dollar's move continues. Remember that a stronger dollar generally pushes EURUSD and GBPUSD lower, while it pushes USDJPY, USDCHF and USDCAD higher. The direction is easy to mix up when the dollar appears on different sides of a currency pair. The video walks through each chart so viewers can see what the dollar's strength means for that pair, and what price would need to do to challenge the current move.

Some quick notes for each:

• EURUSD: The pair fell below the next targets at 1.1419 and 1.14072. On the downside, traders will look toward 1.1377 and 1.13634, followed by the July low at 1.13525. The June low bottomed at 1.13243. The 1.1419 level is now close risk; as long as the price stays below it, sellers are in firm control.

• USDJPY: The pair moved above a key swing-area target at 157.90 up to 158.04. The 200-day moving average at 158.433 is the next key target. A move above that longer-term average would shift the bias even more in favor of buyers. Recall, however, that the Bank of Japan checked rates on Friday after the price moved up to the 158.045 area, so caution must be maintained. That official attention to the exchange rate is a reminder that this stretch carries a risk no chart level can fully capture.

• GBPUSD: The pair moved below the July low at 1.32729. That level is now a close-risk level for traders, in addition to 1.3303 and a more important swing area between 1.3321 and 1.3340. On the downside, there is a lot of support until around the 1.3218 level, followed by a swing area down to 1.3171 and 1.3181.

• USDCHF: The pair moved above its 100-hour moving average at 0.82237 and settled against that level before moving to new session highs near 0.8750. The 0.8237 level is now close risk. If the price stays above that moving average, buyers are in firm control, with the high price for the year at 0.8262 as the next target. That level is the highest going back to the end of May 2025. Another key support level at 0.82116, which is the 38.2% retracement of the trading range since the January 2025 high.

• USDCAD: The pair continues its trend move and is moving away from its close-risk level for traders at 1.4080. The high price has extended to 1.4106. The next key target area comes in near 1.41297 up to 1.41488, where a topside channel trendline also sits, adding to the area's importance for both buyers and sellers. Be aware.

Source: InvestingLive