Why US Dollar Nears Three-Month High? Unpacking the Impact of Election Uncertainty
The US Dollar (USD) has had a very strong run this week as investors rush to the currency due to the persistent uncertainty about the US presidential election.
With the US Dollar Index at a three-month high, the rally in the Greenback is mainly due to a combination of safe-haven inflows and a readjustment of market expectations for the interest rate outlook at the Federal Reserve.
Current Market Situation
The DXY continues to advance, trading in the much-criticized technical area, which it has now proven to be truly anticipating further upside. As disappointing reports from US equities resulted in further decline, this is commensurate with the surge in demand for the dollar.
Stock markets’ uncertainty has urged investors to find safety in alternative investments, bringing significant inflows into the USD.
US 10-year benchmark bond yield was up from 4.07% for most of the week and now stands at around 4.23%, reflecting sell-off in US bonds after a period of stable performance.
This week is rather sparse on the economic calendar, with only Existing Home Sales due to be reported.
Consensus had been for sales numbers in September to fall to 3.9 million units, but even this estimate was surpassed when actual sales came in at 3.84 million units.
This will have to signal further setbacks in the housing market and thus add to the complications the economy is likely to face heading into the presidential election.
Earnings Reports Influencing Markets
Investors will also be paying attention to the earnings reports from key companies such as Tesla, IBM, Boeing, and Coca-Cola, among others.
Earnings reports may provide investors with some sense of direction regarding the key economy’s changes and consumer spending, hence influencing market feelings further.
According to reports, at 11:00 GMT, Mortgage Bankers Association reported a fourth consecutive week of declining mortgage applications, with a contraction of 6.7%.
This comes after a much more significant drop of 17% the previous week, showing that there is indeed a deceleration in the housing market.
More news was coming from Federal Reserve as officials like Governor Michelle Bowman and President Thomas Barkin brought up various subjects, but nothing appeared important enough in the matter to affect the market or change the course of many.
Equity Market Performance
US stocks continued to come under pressure, and the Nasdaq led the declines, with a loss of about 1%.
Chinese indices made a beeline for the finish line among all the red that crossed the global equity markets, excepting the disparities between various economies’ performance.
Interest Rate Outlook
The FedWatch Tool by CME believes that the Federal Reserve would be lowering its rates by 25 basis points during its next meeting on November 7, but the probability of no change has been 11.1 percent against 88.9 percent.
Expectation of the cut has been one of the factors that point to the trend of strength in the USD due to the potential monetary policy changes.
Technical Analysis US Dollar Index
Technical analysis, the DXY is prepared to close off the month of October with rally momentum.
The index broke above the resistance point 104.00 and entered a range in which it will test higher resistances. The first key upside target for the DXY would be at 105.00.
Beyond this, more serious resistances will begin to take place at 105.53 and 105.89. Profit- taking levels beyond this are evident at 106.52 and 107.35.
Solid support is close to the 200-day simple moving average (SMA) and was recently tested at the mark of 103.81.
Traders should avoid allowing false breaks through here, and possibly will not be tempted to get long again until there’s a daily close below it.
The two next levels of marked support lie at the 100-day SMA at 103.19, and at the critical March 12 high at 103.18.
A break below these levels may open up a wider gap down to the 101.90 support zone, where the 55-day SMA lies at 101.91.
Conclusion
The US Dollar is well in the limelight today, largely driven by the inflection of market volatility, bond yield volatility, and the presidential election.
Given the dynamics investors currently face, both the release of economic data as well as broader market sentiment will likely have an influence on the DXY.
To be sure, the US election and Fed meeting will be key events for the dollar in the near term.
