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The dollar index consolidation, government shutdown risk and policy-level variables increase uncertainty in the dollar
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Hello everyone, today XM Foreign Exchange will bring you "[XM Group]: The US dollar index consolidation, the risk of government shutdown and the policy level of variables increase the uncertainty of the US dollar." Hope it will be helpful to you! The original content is as follows:
During the European session on Monday (September 29), the US dollar index (DXY) remained around $97.95. Despite the resilience, its gains are still limited, and investors are considering the potential risk of the U.S. government shutdown and the rise in expectations of the Fed's interest rate cut later this year.
The risk of shutdown increases uncertainty in the outlook for the dollar
The political dynamics of the U.S. government have kept traders cautious. The 2026 fiscal year will open on Wednesday (the expiration date of federal government funds), and the market is preparing for the possibility of a partial shutdown in the government. The lawmakers are still divided, and failure to reach a funding agreement could disrupt key government functions and weaken investors' confidence in the dollar.
The U.S. Congressional Budget Office previously estimated that the government shutdown from 2018 to 2019 resulted in a $11 billion reduction in GDP, a figure highlighting the economic consequences of a prolonged political stalemate.
Ray Attrill, head of foreign exchange research at National Australia Bank, said, "I think the general assumption in the market is that if the government does shut down, we may not see non-farm employment data. So... in the face of a data 'unreleased', how should we trade it? There is no way to trade it. The next Fed meeting will not be held until the end of October. So I speculate that the current mainstream assumption in the market should be: Even if the government shuts down, I hope the shutdown will not last too long, so that the relevant data can still be prepared and released before the October meeting."
Inflation data confirms price stickinessTrend
At the economic level, the personal consumption expenditure (PCE) price index, as the Fed's preferred inflation indicator, highlights the sustainability of price pressure. Overall PCE rose 2.7% year-on-year in August, higher than 2.6% in July; the year-on-year increase of core PCE, excluding food and energy prices, stabilized at 2.9%.
From the monthly data, overall PCE rose by 0.3% in August, and core PCE rose by 0.2% month-on-month. These data show that current inflation is still higher than the Fed's target, making the Fed's balancing action between "supporting economic growth" and "controlling prices."
The market expects interest rate cuts in October and December
Although inflation is at a high level, traders continue to bet that the Federal Reserve will implement monetary easing policies. According to the CME FedWatchTool, the market believes that the probability of a rate cut in October is 90%, and the probability of a rate cut in December is close to 65%.
This "double" expectation limits the upward momentum of the dollar, as investors expect the Fed to ease economic risks through policy adjustments.
However, the recent strong U.S. economic data has weakened expectations that the Fed would cut interest rates significantly. The market currently expects that by December the Federal Reserve will only implement interest rate cuts of about 40 basis points.
Fed officials' speeches will guide short-term market sentiment
The current market focus turns to speeches by Fed officials, including Fed Governor Christopher Waller, Cleveland Fed Chairman Beth Hammack and New York Fed Chairman John Williams.
The above officials will speak later on Monday, with content that may provide key signals to the market to reveal the Fed's views on inflation risks, economic growth prospects and potential timing of interest rate cuts.
If the tone of the official speech is "hawkish" (i.e., tend to maintain or tighten monetary policy), it may provide short-term support for the US dollar; but overall, fiscal uncertainty and policy-level variables will still put pressure on the US dollar's prospects.
Technical Analysis
The US dollar index (DXY) is currently maintaining around $97.95, and is testing the support strength of its upward channel lower rail. The index previously fell from $98.56 (the seller started to intervene at this price), but it is still above the 50-term index moving average (50-EMA, $97.94) and the 200-term index moving average (200-EMA, $97.71), and the short-term trend structure has not been destroyed.
The Relative Strength Index (RSI) is 43, indicating that momentum has fallen from overbought levels, which means that the market may enter a consolidation phase rather than immediately facing downward pressure. If the index rebounds from the current level, it may retest the range of $98.30-98.50; if the closing price is lowAt $97.90, it may fall further to $97.20.
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