The next disadvantage comes 100.00

• US dollar index hits fourth straight weekly decline.
• Investors price in about 75 bps of easing by the end of the year.
• The NFP and Chairman Powell get all the attention next week.

Pessimism around the US dollar (USD) persisted this week, pushing the US Dollar Index (DXY) to new lows near the psychological 100.00 level on Friday, the weakest point since summer 2023.

It’s not over for the greenback’s downtrend after the Federal Reserve’s (Fed) unexpected interest rate cut on September 18.

Strong speculation about further interest rate cuts at the next two Federal Reserve meetings, along with continued optimism about a soft landing for the US economy, are expected to keep a positive tone in risk-sensitive markets. This, in turn, is likely to keep the US dollar under continued pressure for the time being.

So far, the dollar’s price action is highlighting a key resistance area just below the 102.00 level. The broader bearish trend is likely to persist as long as DXY remains below the critical 200-day moving average (SMA) at 103.73.

Bets on a US soft landing remained elevated

After the surprise rate cut in September, market participants are now focusing on the performance of the US economy to better gauge the likelihood of further rate cuts. Last Wednesday’s event marked the Fed’s first rate cut of 2020, with a larger-than-expected 0.5 percentage point drop in the Fed Funds Target Range (FFTR), now set at 4.75%-5, 00% The Fed described the move as a “recalibration” aimed at supporting economic momentum.

The Committee’s post-meeting projections indicated that further rate cuts could occur before the end of the year. Policymakers now expect inflation to fall faster and unemployment to rise more than previously anticipated.

At his press conference, Fed Chairman Jerome Powell expressed optimism, saying he does not foresee an economic downturn or recession in the near future, citing robust growth, low inflation and a stable labor market. He downplayed the likelihood of a recession.

Investors are still pricing in about 75 basis points for further rate cuts for the rest of the year. Although recession worries have eased, upcoming economic data will be crucial in shaping the Fed’s monetary policy in the coming months.

According to CME Group’s FedWatch tool, there is currently a 52% chance of a half-point rate cut at the Fed’s Nov. 7 meeting, with a 25-basis-point cut favored for December.

Not all Fed officials appear to be leaning toward further easing

Markets heeded the first voices following the Fed’s 50 bps rate cut.

That said, Atlanta Fed President Raphael Bostic, a noted hawk, and Chicago Fed President Austan Goolsbee, a dove, both expressed support for the recent rate cut, citing progress on inflation and growth unemployment.

Instead, Fed Governor Adriana Kugler argued that while the fight against inflation is underway, it is not yet won.

Fed Governor Michelle Bowman stressed the need for caution as key inflation measures remain above the core 2 percent target, suggesting it may be time for the Fed to adjust monetary policy. She balked at last week’s half-point rate cut, arguing for a more “measured” quarter-point cut because of potential risks to inflation, such as disruptions to global supply chains, aggressive fiscal policies and mismatch between housing demand and supply.

Interest rates rising or falling? A global vision

The Eurozone, Japan, Switzerland and the United Kingdom are facing mounting deflationary pressure, with economic activity following an erratic path.

In response, the European Central Bank (ECB) executed its second interest rate cut earlier this month and maintained a cautious stance on future actions for October. While ECB policymakers have not confirmed further cuts, markets anticipate two more cuts by the end of the year.

Similarly, the Swiss National Bank (SNB) cut rates by another 25 basis points this week. The Bank of England (BoE) kept its policy rate steady at 5.00% last week, citing persistent inflation and high prices in the services sector, combined with strong consumer spending and stable GDP data.

Meanwhile, the Reserve Bank of Australia (RBA) opted to keep rates unchanged at its last meeting on September 24, while signaling a dovish narrative in its subsequent remarks. Analysts see the possibility of easing starting in early 2025. The Bank of Japan (BoJ) maintained a dovish stance at its September 20 meeting, with money markets predicting just 25 basis points of tightening over the next 12 months.

The intersection of politics and economics

Despite Democratic presidential nominee Vice President Kamala Harris being seen as the winner of the recent debate against Republican nominee and former President Donald Trump, recent polls still show a close race as the Nov. 5 election nears.

If Trump wins the election, his administration could restore tariffs, potentially disrupting or reversing the current disinflationary trend in the US economy and shortening the window for Fed rate cuts.

On the other hand, some analysts suggest that a Harris administration could implement higher taxes and pressure the Fed to ease monetary policy, especially if there are signs of slowing economic growth.

What’s happening next week?

Next week promises to be eventful on the US economic calendar. With the Fed’s focus shifting from inflation to the labor market, the upcoming Non-Farm Payrolls (NFP) report will take center stage towards the end of the week.

Also of note will be the ADP report, which measures US private sector job growth, along with the JOLT Job Openings and ISM reports for both the manufacturing and services sectors.

Technicals on the US Dollar Index

As the US Dollar Index (DXY) dipped below its 200-day simple moving average (SMA) at 103.73, it has managed gains in just one of the past seven weeks.

The DXY is now facing considerable downward pressure with strong support at the year-to-date (YTD) low of 100.15 (set on September 27). Further bursts of selling pressure could trigger a move to the psychological 100.00 level, with a potential retest of the 2023 low at 99.57 (recorded on July 14) emerging on a breach of this level.

On the other hand, the index could experience a short-term recovery. Initial resistance is likely to come at the September high of 101.91 (set on September 3), followed by the 55-day SMA at 102.28 and the weekly high of 103.54 (set on August 8). The 200-day SMA would act as a critical barrier if the latter is breached.

Additionally, the Relative Strength Index (RSI) on the daily chart has confirmed recent lows hovering around 40. This suggests there is still room for further losses before reaching the oversold threshold at 30. Meanwhile, the the average directional (ADX) remains near 41, signaling that the ongoing downtrend is moderately strong, but not at extreme levels.