Dollar forecast: DXY extends gains for third day
The US dollar traded higher for the third day against a basket of foreign currencies. As well as finding support from Powell’s not-so-dovish comments earlier this week, we have seen some stronger labour market indicators to reduce the odds of another outsized rate cut this year. Boosting the dollar forecast further has been the escalation in the Middle East conflict. The greenback is therefore likely to remain on the front-foot while geopolitical risks remain elevated and ahead of the US jobs report on Friday. The latter could then determine which direction the greenback will want to take in the near-term, before the focus turns to US presidential election.
Geopolitical tensions impact dollar forecast
The dollar forecast has been influenced by escalating tensions in the Middle East, with markets factoring in heightened geopolitical risks. The recent missile exchange between Israel and Iran has traders closely watching Israel's next move, as any retaliation could send further shockwaves through global markets. Israel has vowed to respond while intensifying its ground offensive in parts of Lebanon.
Still, for the second time this year, the prospect of de-escalation hovers in the background. Should Israel opt for a measured response—avoiding strikes on sensitive sites such as Iran's nuclear infrastructure—the markets may stabilise, as investors could perceive the situation as contained in that scenario. However, if the conflict intensifies, markets will likely price in even greater risk, bolstering the dollar forecast in the short term.
Oil prices surge amid uncertainty
Oil prices have been quick to react, rallying yesterday as news of Iran's missile preparations broke, and hovering around $75 per barrel. Traders are now waiting to see the scale of Israel's retaliation before making further moves. The dollar has strengthened in tandem with rising oil prices, as uncertainty continues to dominate the geopolitical landscape.
While oil typically surges during times of conflict, the dollar’s movement has followed a similar pattern, bolstered by its status as a safe-haven currency. However, if Israel's response remains contained, markets may interpret this as a sign that both sides are willing to de-escalate, easing the pressure on oil and stabilizing the dollar forecast. Still, with tensions this high, the situation remains fluid, and volatility is to be expected.
US data adds complexity to dollar forecast
Amid the geopolitical drama, domestic US economic data has been somewhat overshadowed but remains critical to the dollar forecast. Fed Chair Jerome Powell pushed back against the idea of another 50bp rate cut this year, with strong job openings data and a solid ADP private payrolls report supporting his hawkish stance. While manufacturing data was softer than expected, the labour market’s resilience keeps the dollar on a firm footing in as far as this week is concerned.
Friday’s payroll report will be a key event for FX markets, especially as traders balance geopolitical risk with domestic economic performance. Although markets are still pricing in more than 50 basis points of rate cuts by the year’s end, Powell’s recent remarks suggest the bar for a dollar-negative report is quite high. Before then, Thursday’s release of ISM services PMI and jobless claims figures could further complicate the dollar forecast as they offer additional clues on the health of the US economy and jobs market.
Dollar Index (DXY) technical analysis: levels to watch
The fact that the dollar index has broken above short-term resistance around the 101.00 handle suggests the short-term bearish trend has ended. However, the longer-term trend remains intact, but we will now need to see some stimulus to re-establish that bear trend. Perhaps, Friday’s jobs report could be the trigger, or potentially the outcome of US presidential election on November 5. From a purely technical point of view, the next potential resistance zone to watch is around 101.85, where recent highs meet the bearish trend line from June. Further higher, the area between 102.20 to 102.50 is going to be very important with the March low of 102.35 coming in bang in the middle of that range. The low in March was a significant one, and for as long as we remain below it, the dollar risks remain skewed to the downside in the near-term outlook despite the more recent gains this week.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
How to trade with City Index
You can trade with City Index by following these four easy steps:
-
Open an account, or log in if you’re already a customer
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
- Search for the company you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.
City Index is a trading name of StoneX Financial Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.
While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.
StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.
It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.
StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.
© City Index 2024