US Dollar Gains Slightly in Calm Markets Ahead of Fed Speakers

The US Dollar (USD) saw modest gains as the week began, supported by limited market activity due to the Columbus Day holiday. With bond markets closed, investors are focusing on the upcoming speeches from Federal Reserve (Fed) officials, hoping for clues about future monetary policy. The US Dollar Index (DXY) remains close to the psychological 103.00 mark, awaiting potential catalysts to determine its next move.

Market Overview: Quiet Start with US Markets Partially Closed

With Columbus Day observed in parts of the US, many markets, including bonds, remain closed, contributing to the calm sentiment. Despite the holiday, three Federal Reserve officials are scheduled to speak, which could provide insight into the Fed’s monetary policy outlook. In particular, traders will pay close attention to Federal Reserve Governor Christopher Waller and Federal Reserve Bank of Minneapolis President Neel Kashkari.

Key Events for Monday:

• Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, is expected to participate in two important discussions about fiscal deficits, monetary policy, and inflation. These will take place during the Central Bank of Argentina’s Money and Banking Conference and a separate event at the Torcuato di Tella University.
• Christopher Waller, a Federal Reserve Governor, is set to discuss the economic outlook in the US at a Stanford University event.

The light US economic calendar this week makes these Fed speakers’ remarks particularly significant. Traders are hoping for guidance on whether the Federal Reserve will proceed with interest rate cuts or maintain a more cautious approach as inflationary concerns persist.

Fed Policy Expectations: Focus on November Rate Decision

The current market sentiment reflects an 88.2% probability of a 25 basis point rate cut at the Fed’s meeting on November 7, while only 11.8% expect no change in rates. Notably, the possibility of a larger 50 basis point cut has been fully priced out, highlighting investor expectations for a moderate approach by the Fed.

Though the bond market is closed due to the holiday, the 10-year US Treasury yield was 4.10% at the close of last week. These higher yields have bolstered the USD, attracting foreign investors looking for stronger returns on US assets.

Fed Speakers in Focus: Waller and Kashkari

The remarks from Fed speakers are the most anticipated events in the early part of the week. Christopher Waller’s reputation for delivering market-moving comments could provide traders with fresh clues on the Fed’s stance. Waller’s insights into inflationary pressures and interest rates will be watched closely, as they could shape market expectations.

Similarly, Neel Kashkari, who has been an outspoken member of the Federal Open Market Committee (FOMC), will share his views on fiscal deficits, inflation, and monetary policy. His stance could provide further guidance on how the Fed plans to navigate the current economic challenges.

Technical Analysis: US Dollar Index (DXY) Near Critical Levels

The US Dollar Index (DXY) continues to orbit around the key 103.00 level, with traders looking for a catalyst to push it higher or trigger a pullback. Here’s a closer look at the key technical levels for the USD:

Upside Targets:

• 103.00 is the first psychological resistance level. A breakout above this could lead to a test of 103.18, with additional resistance at the 100-day Simple Moving Average (SMA) of 103.24.
• Further resistance levels include the 200-day SMA at 103.77 and a key zone around 104.00, which would be a significant hurdle for the DXY to overcome.

Downside Risks:

• On the downside, initial support lies at the 55-day SMA at 101.88, followed by the 102.00 round level. These levels should provide a buffer against any bearish pressure in the near term.
• If these levels fail to hold, the DXY could slide toward its year-to-date low of 100.16, with 99.58 (the July 14 low) as a potential support target below that.

Awaiting Fed Clarity

As the week progresses, the US Dollar is expected to remain stable unless Fed speakers provide any surprises that could sway market sentiment. With the bond market closed and a light economic calendar, volatility is likely to stay low, but this could change quickly depending on the tone of the Fed’s communications.

The USD continues to draw strength from high Treasury yields and the expectation that the Federal Reserve will take a measured approach to monetary policy. However, traders remain cautious, especially given the recent inflation data and ongoing uncertainties in the global economy. For now, the USD is holding steady, but the coming days could bring clarity that pushes it higher or forces a pullback.