The US Dollar Index (DXY) took quite a tumble during Wednesday’s US trading session, wouldn’t you know. It slipped below that rather important Fibonacci support level of 98.714. This decline owes itself to a couple of factors: traders are increasingly hopeful for a Federal Reserve rate cut and there’s been a charming recovery in global risk sentiment. As a result, there’s a bit more love for those vibrant, riskier currencies.
Following the four-day consolidation range’s breach, the DXY finds itself under more pressure. Traders now have their eyes keenly set on two critical support levels: 98.238 and the good old 50-day moving average hovering around 98.025.
Fed signals intensify rate-cut expectations
One might wonder why the dollar’s been feeling a bit down in the dumps. Well, it’s down to our Fed chieftain, Jerome Powell. During his speech on Tuesday, he took a dovish tone, blaming a stagnant US labor market and rather uninspiring hiring momentum. Due to the prolonged US government shutdown, official economic data has been scant. Powell’s remarks have markets almost certain the Fed’s leaning towards accommodative monetary policies.
From the London Stock Exchange Group (LSEG)’s data, the federal funds futures market reveals two clear expectations: a 25-basis-point rate cut at the Fed’s October 28-29 meeting and another expected by December. Further rate cuts are also anticipated in 2026, if you can believe it.
Risk asset rebound diminishes the dollar’s safe-haven appeal
Meanwhile, sentiment’s been on the up in both European and US stock markets, leading to capital flowing away from the dollar. Incidentally, a charming rebound in the S&P; 500 Index, along with rather robust corporate earnings, has rekindled investor interest in equities. Francesco Pesole of ING Groep noted as risk assets rebound, funds are shifting towards other assets away from the dollar.
In Europe, with optimistic earnings expectations and a stable political scene in France, the Stoxx 600 Index enjoyed a 0.8% rise. Thus, the euro celebrated its second consecutive day of gains with the euro-dollar exchange rate nudging up to 1.1635.
Non-US currencies have collectively strengthened, putting pressure on the US dollar. The yen and the Australian dollar bounced back from last week’s heavy sell-off, both making gains. Despite Japan’s political uncertainty, the yen held its ground, while the Australian dollar smiled at stronger regional stock markets.
Following assuring statements from UK finance officials about the forthcoming fiscal plan, the pound-dollar exchange rate rose by 0.6% to 1.3393. These strengthening non-US currencies nudged the US Dollar Index down by 0.33% to 98.711, continuing Tuesday’s decline.
Ongoing trade tensions, yet a stable bond market
Now, even with lingering trade tensions, US Treasury yields remained steady, courtesy of cautious bond traders. The 10-year US Treasury yield barely budged, edging down to 4.009%, while the 2-year yield held around 3.487%. Investors are vigilantly monitoring two key developments: President Trump’s trade sanction threats and China’s pointed counter moves against US companies.
Short-term outlook: US Dollar Index leaning bearish
Currently, the US Dollar Index is toeing a significant retracement level. There’s no nearby support until we meet the 50-day moving average at 98.025, and market sentiment has distinctly tilted downwards.
Unless the dollar finds its feet and bounces at that 50-day moving average, a further retreat to 97.412 remains on the cards. Given the growing rate cut expectations and sustained high risk appetite, this correction feels rather likely.
For further insights, consider a glance at the Daily U.S. Dollar Index Chart provided by Yihuitong.
