Key points:
The U.S. dollar firmed up in early trading, bolstered by Powell’s firm stance on future monetary policy decisions.
His speech suggested the Federal Reserve is unlikely to pursue larger-than-expected interest rate cuts, reducing market expectations for a 50-basis-point (bps) reduction in November.
See: USDX maintains its stability on the VT Markets app now.
We look to the charts for more guidance. The dollar index (DXY) closed at 100.660, continuing its recovery from the recent low of 99.845. The index gained 0.19% in today’s session, marking its second consecutive day of upward movement, driven by the market’s recalibration of expectations regarding the U.S. Federal Reserve’s rate cut strategy.
The MACD indicator reflects growing bullish momentum, with the MACD line crossing above the signal line, and the histogram expanding in positive territory. The moving averages (5, 10, 30-period) are aligning with this upward trend, as the price stays above the 5-period moving average.
Traders are now eyeing the resistance level near 100.70, which has been tested today. A break above this could signal further gains towards the next target at 101.00. However, key support is located at 100.20, and a breach of this level might trigger a retracement.
Powell’s comments at the Tennessee conference came amid growing speculation on how the Fed would move forward with rate cuts. He clarified that the Fed would likely continue with smaller, quarter-percentage-point cuts, cautioning that rapid easing could misalign with the economic outlook.
Traders have revised their expectations, lowering the likelihood of a 50 bps cut from 53.3% to 35.4%, according to CME Group’s FedWatch Tool.
With the next policy-setting meeting approaching in November, the dollar’s trajectory could be influenced by key economic reports set to be released this week.
In the currency market, the yen has steadied after experiencing a volatile start to the week. The Japanese yen traded at 144.27 per dollar, up 0.45%, after oscillating between 146.495 yen on Friday and 141.65 yen on Monday.
Traders were reacting to political developments as Shigeru Ishiba was set to become Japan’s new prime minister.
You might be interested: Ishiba to Reshape the Japanese Economy
Despite his previous hawkish stance on monetary policy, recent rhetoric suggested a more cautious approach. This continuity in the Bank of Japan’s (BOJ) dovish monetary policy is likely to keep the yen under pressure, with traders adopting a “buy on dips” strategy for the USDJPY pair.
Meanwhile, the euro remained relatively stable, trading at $1.113575, as traders digested mixed economic signals from the Eurozone. German inflation fell to its lowest level since early 2021, adding to speculation that the European Central Bank (ECB) may take a more dovish stance at its upcoming policy meeting.
However, ECB President Christine Lagarde has expressed confidence that inflation would return to the bank’s target in due course, leaving room for potential rate cuts to support economic recovery.
Traders will likely remain cautious until the October 17 policy decision, as the direction of the euro will hinge on inflation trends and the ECB’s next moves.
The euro’s recent dip to $1.1113 is representative of the currency’s vulnerability to softer economic data.
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