USD Index Holds in Mid-106.00s, Limited Downside amid Soft Bond Yields

The US Dollar Index (DXY), reflecting the US dollar’s value against a basket of foreign currencies, has recently faced a bearish streak, settling near its lowest point during the Asian trading session on Thursday. Despite this decline, it has retained some of its gains for the week, reaching an almost 11-month high earlier this week. Traders are eagerly awaiting signals regarding the Federal Reserve’s upcoming policy decisions.

On Wednesday, the US ADP report revealed that private-sector job additions in September were a meager 89,000, a substantial drop from August’s revised 180,000 and below market expectations. This disappointing data, coupled with a decrease in the US ISM Services PMI from 54.5 in August to 53.6 in September, has prompted the Fed to reconsider further interest rate hikes. Consequently, US Treasury bond yields have decreased, prompting some profit-taking in the USD.

Despite these developments, recent statements from several Fed officials suggest a commitment to continued policy tightening to combat inflation and return it to the 2% target. This aligns with the Fed’s hawkish outlook, and the expectation remains for at least one more rate increase by year-end. These factors are likely to limit any further decline in US bond yields and support the USD, urging caution among bearish traders.

Investors are also likely to remain cautious ahead of Friday’s release of the eagerly awaited US monthly jobs data, known as the Nonfarm Payroll (NFP) report. This report will heavily influence market expectations regarding the Fed’s future rate hike trajectory and the near-term direction of the USD.

In the meantime, Thursday’s release of weekly Initial Jobless Claims data from the US, along with fluctuations in US bond yields, is expected to generate market momentum during the early North American trading session. This data will offer insights into the labor market’s health, a key factor in the Fed’s policy decisions.

In conclusion, although the USD Index is currently experiencing a downward trend, several factors, including the potential for further Fed policy tightening and expectations of more rate hikes, are mitigating the decline. Market participants are eagerly awaiting key data releases to gain fresh insights into the Fed’s future actions, which will significantly influence the USD’s trajectory.