US dollar gains with Powell and geopolitics as main drivers

• The US Dollar strengthens on overnight comments from Fed Chairman Powell.
• Israel began its ground offensive in Lebanon, escalating tensions in the region.
• US dollar index prints four-day high ahead of ISM Manufacturing PMI data.

The US dollar (USD) is trading broadly positive on Tuesday, ahead of the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) numbers. The greenback’s positive turn came after traders priced in fewer interest rate cuts from the Federal Reserve (Fed) based on comments from Chairman Jerome Powell.

Geopolitically, Israel has begun its incursion into Israel in what it calls “a limited ground offensive,” the Financial Times reports. Any further escalation of violence in the region could trigger refuge flows that generally tend to support the greenback.

Looking at the economic calendar ahead, the ISM Manufacturing survey will be the main driver on Tuesday. However, other elements will also take some attention. The JOLTS Job Openings report will provide clues on how labor demand is shaping up, while traders’ eyes and ears will need to be kept open as five Fed members are set to take the stage.

Daily Market Summary: Markets will become even more data-driven

• Fed Chairman Powell dropped some remarkable comments overnight. One was that the Fed is actually considering data for its upcoming policy meeting during its lockdown period. This will make the markets even more data dependent in the run up to the event.
• Israel is waging a “targeted” ground offensive in Lebanon as Hezbollah fires back with artillery and rockets targeting Israeli soldiers near the town of Metula. Meanwhile, the United Arab Emirates issued a statement expressing its deep concern over Israel’s ground operation, warning of the repercussions of this dangerous situation for the region, reports Bloomberg.
• At 13:45 GMT, the final reading of the S&P Global Manufacturing Purchasing Managers (PMI) index for September will be released. Economists expect the number to remain unchanged from its preliminary estimate of 47.
• At 14:00 GMT, ISM Manufacturing figures for September will be released:
  • The headline PMI is expected to rise slightly to 47.5 from 47.2 a month earlier.
  • Among the main sub-indices, the Prices Paid component is expected to fall to 53.5 from 54, while the Employment Index is expected to rise to 47 from 46.
• In the ISM slipstream, the August JOLTS job offers will also be released. A steady number of job openings is expected at 7.670 million from 7.673 million in July.
  • More Fed speakers will take the stage on Tuesday:
• At 15:00 GMT, Federal Reserve Bank of Atlanta Raphael Bostic delivers welcome remarks and moderates a conversation with Federal Reserve Board Governor Lisa Cook at the Technology Enabled Disruption Conference in Atlanta.
• Around 22:15 GMT, Federal Reserve Bank of Richmond Thomas Barkin participates in a discussion with Atlanta Fed President Raphael Bostic and Boston Fed President Susan Collins at the Technology-Enabled Disruption conference in Atlanta.
• European stocks are looking for direction, unsure whether a possible interest rate cut by the European Central Bank (ECB) in October should be seen as a positive or be seen as a sign on the wall that activity in the euro zone is deteriorating rapidly. US futures are trading steady ahead of the US opening bell.
• The CME Fedwatch tool shows a 63.0% chance of a 25 basis point rate cut at the Fed’s next meeting on November 7, while 37.0% is the price for another 50 basis point rate cut. basis.
• The benchmark US 10-year yield is trading at 3.75%, looking to test a three-week high of 3.81%.

US Dollar Index Technical Analysis: Four-Day High

The US Dollar Index (DXY) is getting a boost from Fed Chairman Jerome Powell, whose comments eased market expectations of another big rate cut for the upcoming November rate decision. Fewer chances of a further decline support the US dollar as it underperforms other currencies in the DXY basket, such as the euro (EUR). Markets are increasingly pricing in the European Central Bank (ECB) could be set to deliver a surprise rate cut in October, widening the rate differential in favor of a stronger US dollar.

The recovery looks to be a sharp one, with the DXY already clearing four previous daily highs during Asian trading on Tuesday. If the dollar bulls can turn things around further, look to 101.90 for the next level of resistance to the upside. Just above, the 55-day simple moving average (SMA) at 102.22 will enter.

On the downside, 100.62 turns from resistance to support if the DXY closes above it on Tuesday. The fresh 2024 low is at 100.16, so there will be a test before more downside occurs. Below that, and that means giving up the high of 100.00, the July 14, 2023 low at 99.58 comes into play.

US Dollar Index: Daily Chart