USD Forecast: Neutral
- dollar index (DXY) is coming back to life as demand for safe havens increases amid the Middle East conflict.
- Fed officials say higher yields will be a positive in the fight against the financial crisis. inflation.
- The situation in the Middle East and the actions of policymakers at the US Federal Reserve will likely drive price trends over the coming week.
- Learn more price action,chart patternandmoving average, Please checkDailyFX Education series.
read more: USD/JPY short: DXY rally pause and Bank of Japan’s foreign exchange intervention
US CPI, dovish Fed rhetoric and yields rising
The US dollar has had an interesting and volatile week, to say the least. A strong end to the week following the US CPI data and rising tensions in the Middle East saw the dollar index resume its rise from last week’s weak close.
Improve your trading skills and gain a competitive edge. Get the USD Q4 Outlook now and get exclusive insights on the key market catalysts that every trader should be watching.
Recommended by Zane Vawda
Get Free USD Forecast
Fed policymakers struck a slightly dovish tone early in the week, giving the dollar bear hopes of a deeper retrace. Fed officials said rising long-term Treasury yields may mean the Fed doesn’t need to take as many steps going forward. This was echoed by Rafael Bostic and Susan Collins, who said the rising yield environment reduces the need for further monetary policy tightening in the short term. Now, while the US 10-year yield has risen this week, it is still below last Friday’s peak and is actually experiencing a pullback trade at 4.62% at the time of writing.
US 2-year and US 10-year yields
Source: TradingView, created by Zain Vawda
This week’s US Consumer Price Index (CPI) statistics showed sticky signs, especially with concerns about the financial services sector. The scale of the move is quite surprising given that interest rate hike expectations at the December FOMC meeting barely rose to a high of 42% following the CPI results, but ended the week at around 30%. Ta. This is partly related to the growing uncertainty surrounding the geopolitical situation in the Middle East.
Expectations for Fed rate hike (December meeting)
Source: CME FedWatch Tool
The geopolitical situation in the Middle East may be on the verge of escalation, which gave further momentum to the dollar on Friday. At the time of writing, Israel is about to launch ground air strikes on Gaza, which could lead to an escalation of the conflict since Hezbollah has already said it will not withdraw from the war. Spreads involving countries like Iran and other Arab countries are a real concern and could have a positive impact on the US dollar, and energy markets could pick up as well, something market participants should consider. This has become a real risk. In my opinion, her CPI data for the US should not have caused such a reaction by itself, so this may explain some of the sharp rise in the USD.
US Secretary of State Anthony Blinken is also expected to meet with the leaders of Saudi Arabia and Egypt to avoid escalating tensions. At the moment, there are concerns that the USD will continue to be supported through its safe-haven appeal, and given the lack of data to make a big impact, this could even be a major driver next week.
Trade smarter – Sign up for the DailyFX newsletter
Receive timely and compelling market commentary from the DailyFX team
subscribe to newsletter
economic data entry The week ahead: Focus on retail sales
Looking ahead to next week, we see a slowdown in terms of the only high-impact data events being retail sales and building permit data releases. But there’s a lot of Fed meeting next week, which could lead to more volatility depending on how the market perceives the data. The question is whether geopolitical risks can outweigh comments from Federal Reserve policymakers, and the winner could be the main driver of dollar index price action next week.
For all market moving economic releases and events, DailyFX Calendar
Technical outlook and final thoughts
From a technical standpoint and looking at the dollar index, it remains quite volatile despite closing on a strong note in both the daily and weekly time frames. Last week, a shooting star candle closed without follow-through, but much of that was due to fundamental factors, which are now overshadowed by technical factors. Relying on candlestick patterns and other technical indicators may not be very reliable at times like these when special attention needs to be paid to fundamental factors.
However, looking at the chart, there are some important levels to note, and the 107.00-107.20 area remains a key obstacle to further upside. This caps Friday’s gains and could pose a challenge early in the week unless the gap widens further over the weekend. There is currently no significant resistance above 107.20 until the October 2022 swing low of the 109.50 mark.
US dollar index (DXY) Daily chart – October 13, 2023
Key levels to note:
Looking for actionable trading ideas? Download our Q4 top trading opportunities guide packed with insightful tips.
Recommended by Zane Vawda
Get Free Top Trading Opportunity Forecast
Author: Zain Vawda, Market Writer DailyFX.com
Contact and follow Zain on Twitter: @zvawda