US Dollar Forecast: DXY at the Mercy Geopolitical Developments

2023-10-15 10:00:09

Zain Vawda,

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US DOLLAR FORECAST:
US CPI, DOVISH FED RHETORIC AND RISING YIELDS
ECONOMIC DATA IN THE WEEK AHEAD: RETAIL SALES THE FOCUS
TECHNICAL OUTLOOK AND FINAL THOUGHTS

US DOLLAR FORECAST:

USD FORECAST: NEUTRAL

Dollar Index (DXY) Roars Back to Life as Safe Haven Demand Grows Due to the Conflict in the Middle East.
Fed Officials Say that Higher Yields Are a Positive in the Fight Against Inflation.
Developments in the Middle East and Federal Reserve Policymakers Will Drive Price Action in the Week Ahead.
To Learn More About Price Action,Chart PatternsandMoving Averages, Check out theDailyFX Education Series.

US CPI, DOVISH FED RHETORIC AND RISING YIELDS

The US Dollar has had an intriguing and choppy week to say the least. A strong end to the week following the US CPI data and rising tensions in the Middle East have helped the Dollar Index resume its march higher following a bearish close the previous week.

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Federal Reserve Policymakers struck a rather dovish tone earlier in the week which gave Dollar Bears some hope of a deeper retracement. Fed Officials cited the rising yields on longer dated treasuries may mean he Fed don’t have to do as much moving forward. This was echoed by both Rafael Bostic and Susan Collins the latter of whom stated that the rising yield environment reduces the need for further monetary policy tightening in the near term. Now although the US 10Y yield did rise this week it still fell short of the peak last Friday, and actually experienced a pullback trading at 4.62% at the time of writing.

US 2Y and US 10Y Yields

Source: TradingView, Created by Zain Vawda

US CPI data displayed signs of stickiness this week with concern around the core services sector in particular. Following the CPI print the size of the move was rather surprising, given that rate hike expectations for the December FOMC meeting barely increased peaking at a high of 42% but ending the week around the 30% mark. This in part may have to do with the rising uncertainty around the Geopolitical situation in the Middle East.

Fed Rate Hike Expectations (December Meeting)

Source: CME FedWatch Tool

The Geopolitical situation in the Middle East could be on the brink of spreading which gave the Dollar further impetus on Friday. Israel is about to launch ground raids into Gaza at the time of writing which could lead to escalation in the conflict as Hezbollah has already said it will not stay out of the war. A spread that involves countries like Iran or other Arab countries is the real concern and could have positive implications for the US Dollar and potentially plump up energy markets as well and is now a real tangible risk for market participants to consider. This could in part explain the surge in the US Dollar as in my opinion US CPI data on its own should not have elicited such a reaction.

US Secretary of State Anthony Blinken is expected to meet leaders from Saudi Arabia and Egypt as well to ensure tensions do not spread. At the moment the concern that it will is keeping the US Dollar supported through its safe haven appeal and this could even be the major driving force next week given the lack of high impact data.

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ECONOMIC DATA IN THE WEEK AHEAD: RETAIL SALES THE FOCUS

Heading into next week and we have a slowdown in terms with the only high impact data events being the Retail Sales and Building Permit data releases. We do however have a host of Federal Reserve next week which could add a further layer of volatility depending on how markets perceive the data. The question will be whether the Geopolitical risk can outweigh the comments of Federal Reserve policymakers and the winner could turn out to be the key driving force of price action for the Dollar Index next week.

For all market-moving economic releases and events, see the DailyFX Calendar

TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at the technical perspective and the Dollar Index remains rather choppy as even though we are finishing the with a bullish close on both the Daily and Weekly timeframes. Last week saw a shooting star candle close without follow through and a lot of this is down to the fundamental drivers which at present are overshadowing the technicals. Relying on candlestick patterns and other technical indicators may not prove very reliable at times like this where the fundamental factors need to be given special attention.

Looking at the chart however there are some key levels that we can pay attention to with the 107.00-107.20 area remains a key stumbling block to further upside. It capped Friday’s rally and may provide a challenge on early in the week unless we get a gap higher over the weekend. Now above the 107.20 we do not have a lot of resistance until 109.50 mark which was the October 2022 swing low.

US Dollar Index (DXY) Daily Chart – October 13, 2023