DXY slipped to around 101.00 in early Asian trading on November 4, down nearly 0.52%, as US Treasury yields declined and investors followed the results of the midterm elections.
The 10-year yield fell to 4.919%, reducing the appeal of the USD. But in my view, this is not yet enough to suggest a sustained downtrend, because expectations of further Fed rate hikes remain in place, providing some support for the greenback.
Pressure on the USD had already emerged earlier, when oil prices fell sharply alongside US Treasury yields. If diplomatic efforts progress favourably, energy prices could continue to ease, potentially leaving the greenback with less support from both safe-haven demand and inflation concerns. However, this also needs time to be confirmed.
A decline in oil prices over a few sessions is still not enough to change the inflation outlook, particularly if pressure from wages and domestic demand remains persistent.
Recently, US job openings reached 7.523 million in September, above the forecast of 7.1 million, helping the USD turn from modest losses to slight gains in yesterday’s session before resuming its decline in Asian trading this morning. But this data is not enough to confirm that the labour market is gaining momentum.
It only shows that demand for workers remains resilient and has not put pressure on the Fed to ease policy soon. Still, this is a sign worth watching, because the market’s reaction to the November 3 jobs data shows that the USD can still recover when favourable information emerges and has not entirely lost momentum.
The data and information from recent sessions suggest that the probability of a Fed rate hike in December is currently around 75–79%. This expectation continues to support the USD, although the fact that it has already been priced in may limit further gains in the currency. For policy-related downward pressure to become more pronounced, markets need data weak enough to make investors scale back expectations of further Fed tightening.
This makes the October jobs report, scheduled for release on November 6, an important test. Wage growth, the unemployment rate and revisions to previous figures also need to be considered together. If hiring slows and wage pressures ease, expectations of a Fed rate hike could weaken, leaving DXY under further pressure and opening the way for an extended decline. Conversely, a strong report would reinforce the USD’s interest rate advantage and could quickly narrow the decline.
Personally, I lean towards DXY remaining under pressure in the short term, but I do not believe the greenback has lost its underlying support. The deciding factor is whether easing yields are accompanied by a shift in policy expectations. If economic data does not show a clear enough slowdown, selling pressure on the USD will be difficult to sustain based solely on the initial reaction to the elections and movements in oil prices.
Leave a Comment