Federal Reserve Meeting Approaches as Dollar Index Continues to Decline
On Tuesday, the dollar index was under pressure during the Asian and European sessions, hitting a low of 98.56, continuing its downward trend from the peak of 99.14 on October 22. The market has turned cautious ahead of the Federal Reserve's policy decision, with investors reducing long positions, waiting for Powell's latest statements.
Trading data shows that the dollar index has been declining for four consecutive trading days, breaking through the support of 98.80 and the 61.8% retracement level at 98.65, indicating a weakening short-term structure. The key support level that both bulls and bears are watching is near the 50-day moving average at 98.13. If this level is breached, the possibility of further decline to 97.46 will increase.
Analysts point out that the weakness of the dollar is mainly due to the high market expectations of an impending rate cut by the Federal Reserve. If Powell maintains a dovish tone or hints at continued rate cuts at the meeting, the dollar might continue its current adjustment trend.
Rate Cut Expectations Dominate the Market, Powell's Speech is Key
U.S. Treasury yields slightly declined on Tuesday, with the 10-year Treasury yield at 3.97%, nearing the psychological threshold of 4%. Futures market data indicates that investors have almost fully priced in a 25 basis point rate cut by the Federal Reserve at the October meeting, bringing the rate range to 3.75%-4.00%.
The market is also betting on nearly an 80% chance of another rate cut in December, reflecting concerns about economic slowdown and cooling inflation. Due to the data blackout caused by the U.S. government shutdown, investors lack clear evidence on economic prospects, making Powell's speech the largest catalyst for short-term market direction.
Analysts believe that if Powell suggests that monetary policy might continue to be accommodative, the dollar will weaken further; conversely, if he signals any hawkish sentiment, it could trigger a short-term technical rebound. However, in the current environment of moderate inflation and slowing employment, the market generally sees limited potential for him to take a strong stance.
Bezant Pushes Yen Higher, US-Japan Policy Positions in Focus
Meanwhile, US Treasury Secretary Scott Bezant recently emphasized during a meeting with Japanese Finance Minister Kaoru Katayama that Japan should "normalize" its monetary policy. This statement was interpreted by the market as a hint at a potential rate hike by the Bank of Japan, leading the dollar against the yen to quickly fall from the 153 mark to around 151.20, reaching a one-week low.
Analysts note that Bezant's remarks highlight the US Treasury's concern over the yen's excessive depreciation, which might indirectly influence the Bank of Japan's policy stance. Investors are now focusing on the upcoming Bank of Japan meeting later this week, hoping for more clues on the future path of rate hikes.
Improved Trade Prospects Weaken Dollar's Safe-Haven Demand
Apart from monetary policy, changes in geopolitical economic relations are also putting pressure on the dollar. The upcoming meeting between US President Trump and Chinese leaders injects hope into global trade prospects, boosting market risk appetite. Investors are reallocating assets towards stocks and high-yield currencies, further weakening the dollar.
Analysts believe that even if the US and China have yet to reach a comprehensive trade agreement, any positive signals would be enough to weaken the dollar's safe-haven status in the short term.
Downside Risks Intensify; Focus on 98.13 Key Support
From a technical perspective, the dollar index has formed a short-term downward channel, with the RSI indicator breaking below the midline, and the MACD showing signs of a death cross, indicating weak momentum. If the price falls below the 50-day moving average at 98.13, it will trigger more selling pressure, potentially targeting the 97.46 area.
Conversely, if the dollar can stabilize at 98.80 and break back above 99.14, a short-term rebound opportunity will reemerge, though the overall trend remains weak. Analysts note that without new guidance from the Federal Reserve, the dollar is unlikely to regain strength, and the market is expected to continue a defensive stance.
