US Dollar Surges to Multi-Week Highs Amid Economic Optimism
The US Dollar (USD) experienced a remarkable week, achieving significant gains and marking its fifth consecutive day of increases on Friday. This performance is notable as it represents the first such streak since April. The US Dollar Index (DXY) not only reversed four weeks of declines but also surged past the critical 102.00 level, reaching two-month highs after previously dipping below the crucial 200-week Simple Moving Average (SMA) at 100.56.
Despite the Federal Reserve's unexpected half-percentage point interest rate cut on September 18, the outlook for the US Dollar remains positive. Several factors contributed to this week’s strong performance: a flight to safety following Iran's missile attack on Israel, reduced expectations for further significant rate cuts in upcoming Fed meetings, Fed Chair Jerome Powell's hawkish remarks in Nashville, and a robust US labor market report for September.
The recent price action of the Dollar indicates a solid support zone around the psychological 100.00 level, with the next major target being the critical 200-day SMA. The Greenback gained momentum as global markets shifted towards risk aversion, triggered by the missile strike on October 1, which led to increased volatility, as reflected by the VIX index, commonly referred to as the "panic index."
This flight-to-safety response significantly bolstered demand for the US Dollar while putting pressure on risk-sensitive assets. Following the unexpected rate cut, market participants are now closely monitoring the US economy's performance to gauge the likelihood of further rate reductions. The Fed's focus has shifted towards the labor market, especially as inflation trends downward towards the 2% target.
In his remarks on September 30, Powell indicated that the US economy is on track for a further decline in inflation, which could allow the central bank to lower its benchmark interest rate further. He suggested that a standard move could involve 25 basis point reductions at each meeting. However, not all members of the Federal Open Market Committee (FOMC) share this view. Governor Michelle Bowman has expressed caution, noting that key inflation measures remain above the 2% core target, indicating a need for potential adjustments in monetary policy.
Richmond Fed President Thomas Barkin also highlighted that returning inflation to the 2% target might take longer than anticipated, which could limit the extent of interest rate cuts. Supporting the notion that significant rate cuts are unlikely, September's Nonfarm Payrolls exceeded expectations, with the US economy adding 254,000 jobs and the unemployment rate dropping to 4.1%. Following the labor market report, CME Group's FedWatch Tool now estimates a 95% probability of a quarter-point rate cut in November, a sharp increase from nearly 45% just a week prior.
In contrast, the Eurozone, Japan, Switzerland, and the UK are facing rising deflationary pressures, with economic activity displaying volatility. The European Central Bank (ECB) recently implemented its second interest rate cut and has adopted a cautious outlook for further actions in October, with markets anticipating two additional cuts before year-end. The Swiss National Bank (SNB) also lowered its rates by 25 basis points this month.
The Bank of England (BoE) maintained its policy rate at 5.00%, citing persistent inflation and strong consumer spending as key factors. Meanwhile, the Reserve Bank of Australia (RBA) held rates steady but hinted at potential easing by year-end or early 2025. The Bank of Japan (BoJ) retained its dovish stance, with markets expecting only modest tightening in the coming year.
As the November 5 election approaches, polls indicate a tight race between Vice President Kamala Harris and former President Donald Trump. A Trump victory could lead to the reinstatement of tariffs, potentially disrupting the current disinflationary trend in the US economy and affecting the Fed's rate cut timeline. Conversely, a Harris administration may pursue higher taxes and could pressure the Fed to ease monetary policy if signs of economic slowdown emerge.
Next week, a key event on the US economic calendar will be the release of the FOMC Minutes from the September 17-18 meeting, followed by the publication of September's inflation data via the Consumer Price Index (CPI). Additionally, several scheduled speeches from Fed officials are expected to keep investors focused on the potential interest rate trajectory for the remainder of the year.
Following the recent surge in the US Dollar Index (DXY), the main target now appears to be the critical 200-day Simple Moving Average (SMA) at 103.73. Despite a slight downward trend in DXY this week, there remains strong support at the year-to-date low of 100.15 (September 27). Further selling pressure could lead to a test of the psychological 100.00 mark, with a potential retest of the 2023 low at 99.57 (July 14) if that level is breached.
On the upside, the ongoing recovery is expected to encounter resistance at the provisional 100-day SMA at 103.35 before reaching the pivotal 200-day SMA. Surpassing this region could pave the way for a potential visit to the weekly peak of 104.79 (July 30). Additionally, the Relative Strength Index (RSI) on the daily chart has surged past the 63 level, suggesting that further gains could be on the horizon in the short term. Meanwhile, the Average Directional Index (ADX) has eased to around 33, indicating a slight loss of momentum for the current trend.