14 October 2024

US Dollar Index Plummets to 100.00: What’s Next for the Greenback?

The US Dollar Index (DXY) has hit new lows near the psychological 100.00 level, marking its weakest point since summer 2023, amid ongoing investor pessimism and speculation of further rate cuts by the Federal Reserve.

US Dollar Index Plummets to 100.00: What’s Next for the Greenback?

The US Dollar Index (DXY) has experienced a significant downturn, marking its fourth consecutive weekly decline and reaching new lows near the critical psychological level of 100.00. This drop represents the weakest point for the dollar since the summer of 2023, fueled by ongoing pessimism among investors.

Following the Federal Reserve's unexpected rate cut of 0.5 percentage points on September 18, speculation has intensified regarding further easing measures. Investors are currently pricing in approximately 75 basis points of additional rate cuts by year-end, reflecting a cautious optimism about a soft landing for the US economy. This sentiment is likely to keep the US Dollar under pressure in the near term.

The dollar's recent price action has revealed a significant resistance level just below 102.00. The broader bearish trend is expected to continue as long as the DXY remains below the critical 200-day Simple Moving Average (SMA) at 103.73.

Market participants are now closely monitoring economic indicators to gauge the potential for further rate reductions. The recent Fed meeting marked the first interest rate cut since 2020, with the Fed Funds Target Range (FFTR) now set at 4.75%-5.00%. This move was described by the Fed as a necessary “recalibration” to maintain economic momentum.

Projections from the Federal Reserve suggest that additional rate cuts could be on the horizon, with expectations for inflation to decline more rapidly and unemployment to rise higher than previously anticipated. Fed Chair Jerome Powell expressed optimism during his press conference, asserting that he does not foresee a recession in the near future, citing robust economic growth, decreasing inflation, and a stable labor market.

Despite diminishing recession concerns, investors are still anticipating around 75 basis points of further rate cuts for the remainder of the year. The upcoming economic data will be crucial in shaping the Fed's monetary policy in the months ahead. According to the CME Group's FedWatch Tool, there is currently a 52% chance of a half-point rate cut at the Fed's meeting on November 7, with a 25-basis-point reduction favored for December.

In the wake of the Fed's recent decision, various Federal Reserve officials have voiced their opinions. Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee have both supported the recent rate cut, highlighting progress on inflation and rising unemployment. Conversely, Fed Governor Adriana Kugler cautioned that the fight against inflation is ongoing, while Governor Michelle Bowman emphasized the need for caution, suggesting that inflation measures remain above the 2% core target.

Globally, the Eurozone, Japan, Switzerland, and the United Kingdom are grappling with increasing deflationary pressures. The European Central Bank (ECB) executed its second interest rate cut earlier this month and is maintaining a cautious stance on further actions. Similarly, the Swiss National Bank (SNB) reduced its rates by another 25 basis points this week, while the Bank of England (BoE) held its policy rate steady at 5.00% due to persistent inflation.

As the US approaches the November 5 election, recent polls indicate a tight race between Democratic candidate Vice President Kamala Harris and former President Donald Trump. If Trump wins, his administration could reinstate tariffs, potentially disrupting the current disinflationary trend in the US economy. Conversely, a Harris administration might implement higher taxes and pressure the Fed to ease monetary policy if signs of slowing economic growth emerge.

Looking ahead, next week is set to be eventful for the US economic calendar. With the Fed shifting its focus from inflation to the labor market, the upcoming Nonfarm Payrolls (NFP) report will be a focal point. Additionally, the ADP report, which measures job growth in the private sector, along with the JOLTs Job Openings and ISM reports for both manufacturing and services sectors, will draw significant attention.

Since the DXY fell below the 200-day SMA at 103.73, it has only managed gains in one of the past seven weeks. The index is currently facing considerable downward pressure, with strong support at its year-to-date low of 100.15 set on September 27. Further selling pressure could push the index toward the psychological 100.00 mark, with a potential retest of the 2023 low at 99.57 if that level is breached.

On the upside, the DXY could see a short-term recovery, with initial resistance likely at the September high of 101.91, followed by the 55-day SMA at 102.28 and the weekly peak of 103.54. The 200-day SMA will act as a critical barrier if surpassed. The Relative Strength Index (RSI) on the daily chart confirms recent lows, hovering around 40, indicating room for further losses before reaching the oversold threshold at 30. Meanwhile, the Average Directional Index (ADX) remains close to 41, signaling that the ongoing downtrend is moderately strong but not yet at extreme levels.

Source: FXStreet