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Talking Points:

- The US Dollar is set to close out October at the highs, fitting in with the ten-year trend of gains (October has been the third best month of the year over the past decade).

- As is often the case, strong performance by the US Dollar over the course of the month may giveway to rebalancing effects as winners are trimmed and losers are cushioned.

- Retail trader positioning remains bearish on the US Dollar, which still suggests further gains ahead.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

The US Dollar (via the DXY Index) has punctured its early-October peak to set a fresh yearly high today, continuing to ride its uptrend over the past six-weeks built on the back of concerns over Brexit and the Italian debt saga. But for the remainder of today at least, the DXY Index may have some trouble building extending further at its yearly high and highest level since June 2017 as the month comes to a close.

Notably, the US Dollar has rallied significantly during October, particularly as US equity markets have faced choppy conditions, that rebalancing may yield profit taking in the greenback as portfolio managers shore up positioning in other asset classes that have underperformed.

The DXY Index is up +1.96% month-to-date at the time of writing, on track to be the third-best month of 2018 for the DXY Index and the third-best October over the past decade. It's worth noting that this is not a quarter-end rebalancing, so the effect will be smaller than what was seen at the end of June or September.

Overall, the threat of a short-term rebalancing overhang aside, the US Dollar stands to benefit as simmering issues abroad are overshadowing any concerns with the US economy (notably, the housing market) or the Fed's path of rate hikes (the Fed's recent dot plot outlined one more hike in 2018 and three in 2019, whereas markets are pricing in one more hike in 2018 and only two in 2019).

The economic calendar today features the October US ADP Employment Change report, which will help undergird expectations for Friday's October US Nonfarm Payrolls report. Likewise, with US midterm elections now less than a week away, it would be appropriate for market participants' attention to return back towards the United States.

DXY Index Price Chart: Daily Timeframe (January to October 2018) (Chart 1)

DXY Index Ticks Fresh 2018 High; Don't be Spooked by Rebalancing

Even amid the rebalancing potential (which is minor, so no reason to be spooked), the technical outlook for the DXY Index remains bullish for familiar reasons. Price is still above its daily 8- 13-, and 21-EMA envelope, and the moving averages in sequential fashion. Similarly, both daily MACD and Slow Stochastics are trending higher in bullish territory. The daily 8-EMA should be eyed as trend support; price hasn't closed below the daily 8-EMA since October 16, and the outlook will remain bullish until a close below the daily 8-EMA is achieved.

Read more: US Dollar on the Cusp of Fresh Yearly Highs

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX