The Dollar rally has lost momentum rather than direction, according to ActionForex. DXY stalled as Fed urgency faded and long-end Treasury yields drew buyers. Absent a sizeable US CPI surprise, the Dollar may consolidate ahead of the midterm elections.
The Dollar Index closed the week at 102.232 after reaching 102.536, and it failed to extend higher even as the Euro stayed the weakest major currency. ActionForex says that does not establish a Dollar top, but it suggests the forces that reinforced one another are beginning to separate.
Fed urgency fades
New York Fed President John Williams started the shift on September 29. According to ActionForex, he said there was "no need for urgency" after September's hike. Then September payrolls rose just 29K, and unemployment climbed to 4.2%.
The bond market reflected the change. The US 2-year yield peaked at 4.960% and ended Friday at 4.791%, unwinding roughly 17bp. The Fed has not turned dovish, the report says, but the urgency premium has largely disappeared.
Long-end buyers step in
Long-term yields also eased from their highs. The 10-year yield reached 5.365% during the week before retreating to 5.242% by Friday.
Treasury auctions showed why. The 10-year auction cleared at 5.300%, the highest auction yield since 2000, yet bid-to-cover reached 2.77 against an average around 2.51. ActionForex concludes that the long-yield pillar has stopped strengthening but has not yet turned against the Dollar.
France supports the Dollar through the Euro
French sovereign stress remains one of the main reasons the Euro is under pressure. The OAT-Bund spread reached around 159bp the prior Friday before easing toward roughly 135bp by October 9. EUR/USD ended the week around 1.12015, not far above 1.1159.
CPI and the midterms set the next move
However, the nearest test is US CPI on October 14. Per ActionForex, a soft report could put 101.03 in DXY into play, while a hot one is the clearest route back toward 2-year yields at 4.960%.
The October 27-28 FOMC follows, and then the November 3 midterms. ActionForex says calling a Dollar top requires more evidence.
Source: ActionForex
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