As the Federal Reserve prepares to announce its decision on interest rates for November, all eyes turn to its chairman, Jerome Powell, for signals about future monetary policy.
The dollar index has surged, trading at 106.95 points during Wednesday’s session. With a 99% likelihood of interest rates remaining unchanged, traders are closely monitoring Powell’s tone and comments in the subsequent press conference. Market focus is shifting towards the ongoing quantitative tightening by the Federal Reserve, which significantly shapes the future financial conditions in the United States.
I believe that Treasury bond yields will remain a key factor in determining market movements. While the U.S. Treasury Department expects a decline in borrowing in the fourth quarter, traders eagerly await details of future refinancing plans.
If these plans indicate a significant shift of a large portion of the $1.6 trillion bond sales this year into long-term securities until 2024, it could lead to further increases in already high 10-year yields, currently at 4.89%, which would support the dollar’s strength against dollar-denominated currencies and assets in the medium and long term.
Federal Reserve officials are also closely monitoring various economic indicators. Recent data has shown an increase in labor cost inflation and rising home prices in September.
However, these positive signals have been offset by a decline in U.S. consumer confidence and falling oil prices due to reduced external demand, reflected in contracting manufacturing activity in major economies like China, Japan, and South Korea.
In my view, the dollar index’s trading is far from stability as it follows price movements in the markets. The Japanese yen is approaching its lowest level against the dollar in three decades, partially due to recent adjustments in Japanese monetary policy.
If the yen continues to decline, Japan may reduce its holdings of U.S. Treasury bonds, adding further complexity to future Treasury bond yield movements. At the same time, both the euro and the British pound face negative pressures due to domestic economic factors in Europe and the UK, increasing uncertainty about the dollar index’s short-term movements.
I believe that, while expectations for the Federal Reserve to maintain interest rates during the current November are increasing, the U.S. Dollar Index is at an extremely critical juncture at the moment.
Market participants should be prepared for increased volatility in the dollar index, and exercise caution when trading the dollar against major currencies like the euro, the British pound, the Japanese yen, and precious assets like gold.
On the 4-hour chart, the U.S. Dollar Index (DXY) is currently trading at 106.952 points, close to the major resistance level at 107.904 points. After bouncing up from the 50-day moving average at 105.594 points, trading above this short-term average is a strong signal of upward momentum for the index. Additionally, the price is trading above the 200-day moving average at 103.464 points, indicating a long-term upward trend.
On the daily chart as well, the Dollar Index is trading well above the major support level at 103.402 points. Based on various technical indicators, especially momentum indicators, market sentiment appears to be positively bullish for the Dollar Index in the long term.
However, the Dollar Index could be susceptible to corrective declines near the resistance at 107.90 points if the price fails to remain above the 50-day moving average at 105.594 points, which could lead to a strong bounce from the 200-day moving average support at 103.464 points.
But in case of a breakout above the 107.90 point resistance, the index will target levels of 113.20 and beyond in the medium and long term.