The US Dollar Index is stabilizing between 97.70 and 97.75, recovering after a drop last week. During the Asian trading session, the USD has not shown a clear direction, mainly due to expectations of more rate cuts from the Federal Reserve. Recent weak employment data from the private sector has increased the chances of two more interest rate cuts by the Federal Reserve in October and December. According to Automatic Data Processing, the US lost 32,000 private-sector jobs in September, the largest decline since March 2023. Additionally, revised figures for August were also less favorable, impacting the USD negatively.

Contraction Indicators

The Institute for Supply Management reported that the PMI rose from 48.7 to 49.1 in September, but this still signals contraction. A partial US government shutdown is adding further pressure on the USD, raising economic concerns. Delays in releasing key US economic data, including the Nonfarm Payrolls report, may also affect the dollar’s stability. In recent currency trading, the USD had mixed results. It saw a 0.35% increase against the Japanese Yen over the week but fell against the Pound Sterling and the Swiss Franc. This shows how fluctuating exchange rates have played out over the last seven days. Given the USD’s struggle to hold above the 97.70 level, we expect a bearish outlook in the coming weeks. The disappointing ADP report, indicating a loss of 32,000 private-sector jobs, strengthens our belief that the Federal Reserve will need to respond. As of this morning, the CME FedWatch Tool shows a more than 85% chance of a rate cut at the upcoming October meeting. The partial US government shutdown introduces another risk that the market hasn’t fully factored in yet. The 2018-2019 shutdown reportedly reduced quarterly GDP by about 0.2%, suggesting a prolonged closure now could harm the economy even more. This uncertainty is likely to keep pressure on the dollar, especially with crucial data like the Nonfarm Payrolls report being delayed.

Opportunities In Currency Markets

For traders, the current conditions look favorable for strategies that profit from a declining dollar and rising volatility. Purchasing put options on the US Dollar Index (DXY) offers a low-risk way to position for more downside as the expected Fed rate cuts approach. This bearish outlook is also backed by last week’s Conference Board Consumer Confidence Index, which fell to 98.5, its lowest since the brief recession in 2023. Given the uncertainty, implied volatility for major currency pair options is rising, with one-month EUR/USD volatility surpassing 8% for the first time in months. This suggests that holding long positions in currency pairs like EUR/USD or GBP/USD could be beneficial, as both currencies may strengthen against a weaker dollar. Using options allows traders to take advantage of potential market moves while limiting their losses in case the market sentiment changes suddenly. There is also a chance to short the USD against safe-haven currencies, especially the Japanese Yen. The combination of weak US data and political gridlock is driving more investors towards safer assets like JPY. During similar stress periods in 2023, the USD/JPY pair experienced notable declines, a trend that could repeat in the weeks ahead. Create your live VT Markets account and start trading now.

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