The US Dollar is having a mixed performance. The DXY index shows some strength, mainly against key major currencies. In contrast, high beta and commodity currencies are generally doing well, thanks to a 5% rise in crude oil prices and a slight rebound in gold, which helped reduce earlier losses. The Japanese Yen is struggling because high energy prices are hurting its trade situation. Oil prices rose after the US announced sanctions on Russia’s major energy companies, and the EU also introduced new sanctions on Russia’s energy sector. While global stock markets remain mostly stable, bonds, especially US Treasurys, have sold off, pushing the 10-year yield close to 4%.

Geopolitical Risks and Market Volatility

Geopolitical risks have raised market volatility. Possible US restrictions on software exports to China are negatively impacting tech stocks. On a positive note, talks about the US investing in quantum computing firms for federal funding are encouraging. The market is also looking forward to the US September CPI report, even though a 25 basis point cut in the Federal Funds rate is widely expected. The DXY may soon reach the mid-99 level and could keep rising into November before stabilizing. The US Dollar is getting stronger against major currencies like the euro and yen, with the Dollar Index (DXY) hitting 98.80 this morning. This surge comes despite the market expecting a 25 basis point rate cut from the Federal Reserve. A retest of the mid-99 level seems likely in the weeks ahead. New sanctions on Russia’s energy sector have pushed WTI crude oil prices over $100 a barrel, marking a 5% increase in just one day. This scenario resembles what we saw in 2022, indicating that commodity-linked currencies like the Australian and Canadian dollars will keep performing well. Traders should consider long positions in oil futures and these related currencies. For Japan, which relies on energy imports, high oil prices pose a serious problem. Recent government data revealed that Japan’s trade deficit for September widened by 15% compared to last year, highlighting the strain. Consequently, we expect the USD/JPY pair to approach the 155 level, making it an attractive trade.

Geopolitical Tensions and Market Nervousness

Geopolitical tensions are making markets anxious, especially with discussions about new US software export restrictions on China. Recently, the VIX index, which measures stock market volatility, jumped from a low of 14 to over 17.5 in the past week. This is a clear signal for derivative traders to consider buying volatility, potentially through options on major indices. All eyes are now on tomorrow’s US September CPI report, with analysts predicting a 0.2% month-over-month increase. While the Fed’s rate cut seems certain, any inflation figure higher than expected could challenge the market’s outlook on future policy. This inflation data poses the most significant near-term risk to the ongoing strength of the dollar. Create your live VT Markets account and start trading now.

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