Federal data releases are on hold due to the US government shutdown, making private sector data and Federal Reserve communications important. The DXY is currently around 98.43, as noted by OCBC’s FX experts. This week, several Federal Reserve officials, including Powell, will speak. Recent reports, like the disappointing ISM services report and a slowing labor market, suggest that the Fed may continue cutting interest rates.

Expectations of Ongoing Rate Cuts

The JOLTS report showed that there are more unemployed people than job openings. This adds to expectations for further rate cuts. If negotiations in the government remain stalled, federal worker layoffs might happen. The USD is expected to have a softer trend, with some bullish momentum seen on the daily chart. Resistance levels are at 98.00/40 and 99, while support is at 97.60 and 97.20, with no major data releases today. With the government shutdown preventing official data, we need to pay more attention to private sector statistics to understand the economy’s health. The US Dollar Index is trading around 98.43. The latest ISM Services report shows a contraction at 49.2, which confirms the trend of cooling. This situation forces us to rely on Fed communications and other data sources for direction. The Federal Reserve’s clear intention to ease monetary policy is the main factor pushing the dollar down. Current data from the CME Group shows an 85% chance of a 50-basis-point rate cut at the next Fed meeting. This strong expectation, driven by repeated calls for significant cuts from Fed officials, indicates that any dollar strength will likely be short-lived.

Increased Volatility Ahead

Recent labor market data supports this negative outlook for the US dollar. Last week, the ADP payrolls report showed only a gain of 95,000 jobs, well below expectations. This reflects a slowdown in hiring, following a JOLTS report revealing, for the first time in years, more unemployed individuals than available jobs. This combination of political uncertainty and weakening economic data is likely to increase volatility in the upcoming weeks. The Cboe EuroCurrency Volatility Index (EVZ) has reached a 12-month high, meaning that options premiums are rising. This creates opportunities for strategies like buying straddles on currency pairs such as EUR/USD, allowing profit from significant price movements in either direction without needing to guess the timing. Even though there may be short-term recoveries, the medium-term outlook for the dollar seems weak. We should consider any rallies as chances to sell. Using derivatives, this might involve buying put options or setting up bearish put spreads on the DXY as it nears the resistance around 99.00. This strategy enables us to engage with the expected downside while managing risk. The substantial rise in gold, now above $3,950 an ounce, signals a strong risk-off sentiment in the market. This move toward safety is a typical reaction to US dollar weakness and domestic political instability, similar to patterns seen during past debt ceiling crises. For traders, this strengthens the case for shorting the dollar or taking long positions in precious metals as a safeguard. Create your live VT Markets account and start trading now.

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