USD Rally Continues

The US Dollar rally continues to gather pace as we head through the middle of the week. More importantly, as we round out Q3, many of those USD forecasts from Q2 calling for a lower USD now look wildly offside. The Dollar has enjoyed a near 7% rally over the September quarter driven in part by a shift in Fed expectations. With US inflation picking up again and with data pointing to continued resilience in the economy, the Fed has signalled its intention to hike rates at least one more time while also signalling that rates are likely to stay at higher levels for longer.

Stark Shift in Fed Outlook

This marks a sharp turn from where rates looked to be headed in Q2 when rate cut expectations were already sneaking in ahead of year end. Indeed, with energy prices soaring higher now, and inflation risks building again, the market is looking at higher US rates for much longer than initially thought.

Shutdown Fears Fuelling Safe-Haven Demand

More recently, fears of a partial US government shutdown have also been driving USD higher on safe-haven flows. A budgetary stand-off between Democrats and Republicans is raising the risks of a funding deal being agreed ahead of the next October 1st deadline. Just months after the last narrowly avoided budget crisis, the tense atmosphere looks likely to keep USD supported for now.

DXY

The rally in the Dollar Index has seen the market breaking out above the 104.95 level. With momentum studies bullish, while above here, the focus is on a further push higher and a test of the 107.57 level next. To the downside, 103.48 remains key support should we pull back. 

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