- The DXY struggles to build on its two-day recovery from the yearly low.
- Diminished expectations for a 50 bps Fed rate cut and ongoing geopolitical risks offer support to the USD.
- The upcoming US ADP report could provide momentum ahead of Friday's US NFP release.
The US Dollar Index (DXY), which tracks the performance of the Greenback against a basket of major currencies, is consolidating its recent gains, trading in a narrow range just above the 101.00 level during the early European session on Wednesday. The index has paused its two-day recovery from the yearly low, though the underlying fundamentals suggest caution for bearish traders.
Earlier this week, Federal Reserve Chair Jerome Powell struck a more hawkish tone, indicating two additional 25 basis point rate cuts could occur this year, assuming the economy continues to perform as expected. Moreover, the Job Openings and Labor Turnover Survey (JOLTS) from the US Bureau of Labor Statistics (BLS) revealed a surprising increase in job openings to 8.04 million in August, following two consecutive monthly declines. The data highlights the continued resilience of the US labor market, prompting investors to scale back expectations of more aggressive rate cuts from the Fed.
Additionally, heightened geopolitical tensions in the Middle East have further bolstered the safe-haven appeal of the US dollar. Iran launched over 200 ballistic missiles at Israel on Tuesday in retaliation for Israel's operations against Hezbollah forces in Lebanon. Israeli Prime Minister Benjamin Netanyahu vowed retribution, while Iran warned of widespread destruction in response to any counterattack, escalating the risk of a broader conflict. This instability has dampened investor appetite for riskier assets, driving flows towards traditional safe-haven currencies like the USD.
Meanwhile, markets are still pricing in a more than 35% chance of a 50 basis point rate cut by the Fed in November, acting as a potential headwind for the DXY and warranting caution for bullish traders. Investors will now turn their attention to the upcoming US ADP private-sector employment report for further direction, ahead of Friday’s crucial Nonfarm Payrolls (NFP) report, which will be key in determining the USD's next move.
