Dollar Outlook: Dollar index climbs as traders weigh Fed outlook against political developments
2025-10-22 00:59:57
During the U.S. trading session on Tuesday (October 21), the U.S. dollar index (DXY) continued to rise on Tuesday, boosted by stabilizing interest rate expectations and easing global political uncertainty.
The index broke through two key technical levels of 98.714 and 98.797, which have now become new short-term support levels. Although the 50-day moving average at 98.056 remains a major support level, market attention has now turned to the high of 99.5549 on October 9 and further towards the high of 100.257 on August 1.
The Federal Reserve's next policy decision is about to be announced, and the market is currently focusing on this Friday's CPI inflation report - the report is regarded as the last important data reference before the Federal Reserve's meeting.
Market expectations are that price increases will be lower than in August, which could reinforce the Fed's focus on labor market conditions and the possibility of an interest rate cut. However, if inflation data unexpectedly exceeds expectations, it could change market expectations and reinforce the Fed's hawkish stance.
Treasury yields fall as US government shutdown crisis nears resolution
On Tuesday, U.S. Treasury yields across all maturities fell, with the 10-year yield falling below the psychologically significant 4% mark to close at 3.955%. This decline in yields came amid growing optimism that the U.S. government shutdown crisis could be resolved. White House economic advisor Kevin Hassett stated that an agreement could be reached "very soon" this week, and that the administration is prepared to increase pressure if necessary.
Bond traders are also reacting to a growing drought in US economic data releases, which have stalled for several key indicators, with the exception of the CPI. The decline in short-term Treasury yields underscores market expectations that if labor market data remains weak and inflation slows, the Federal Reserve may soon pause its interest rate hikes or even begin cutting them.
Sanae Takaichi's election pushed down the yen, supporting the overall strength of the dollar.
In the foreign exchange market, the yen weakened sharply after the election of hawkish conservative Sanae Takaichi as Japan's next prime minister. While market sentiment was boosted by expectations of fiscal stimulus from her, the prospect of a delayed monetary policy tightening cycle put pressure on the yen.
The yen fell 0.8% against the dollar to 152.01 yen per dollar, its lowest level since October 14, which also helped the dollar index rise to 98.95, a six-day high.
Expectations that Takaichi Sanae may appoint Satsuki Katayama, a supporter of a stronger yen, as finance minister have increased policy uncertainty. Markets are currently cautious as the Bank of Japan faces conflicting fiscal and monetary signals.
Market Outlook: Policy divergence drives bullish sentiment
(Source of US Dollar Index daily chart: Yihuitong)
Thanks to the support brought by policy divergence and the rebound in optimism about US fiscal stability, the US dollar index is likely to maintain a bullish tone before the release of inflation data on Friday this week.
As long as the index holds above its 50-day moving average, the probability of testing the resistance level of 99.5549 will continue to rise. In the short term, overall risk appetite and global interest rate differentials remain favorable for a stronger dollar.
At 00:50 Beijing time, the US dollar index was 99.8780/8930, up 0.27%.
The index broke through two key technical levels of 98.714 and 98.797, which have now become new short-term support levels. Although the 50-day moving average at 98.056 remains a major support level, market attention has now turned to the high of 99.5549 on October 9 and further towards the high of 100.257 on August 1.
The Federal Reserve's next policy decision is about to be announced, and the market is currently focusing on this Friday's CPI inflation report - the report is regarded as the last important data reference before the Federal Reserve's meeting.
Market expectations are that price increases will be lower than in August, which could reinforce the Fed's focus on labor market conditions and the possibility of an interest rate cut. However, if inflation data unexpectedly exceeds expectations, it could change market expectations and reinforce the Fed's hawkish stance.
Treasury yields fall as US government shutdown crisis nears resolution
On Tuesday, U.S. Treasury yields across all maturities fell, with the 10-year yield falling below the psychologically significant 4% mark to close at 3.955%. This decline in yields came amid growing optimism that the U.S. government shutdown crisis could be resolved. White House economic advisor Kevin Hassett stated that an agreement could be reached "very soon" this week, and that the administration is prepared to increase pressure if necessary.
Bond traders are also reacting to a growing drought in US economic data releases, which have stalled for several key indicators, with the exception of the CPI. The decline in short-term Treasury yields underscores market expectations that if labor market data remains weak and inflation slows, the Federal Reserve may soon pause its interest rate hikes or even begin cutting them.
Sanae Takaichi's election pushed down the yen, supporting the overall strength of the dollar.
In the foreign exchange market, the yen weakened sharply after the election of hawkish conservative Sanae Takaichi as Japan's next prime minister. While market sentiment was boosted by expectations of fiscal stimulus from her, the prospect of a delayed monetary policy tightening cycle put pressure on the yen.
The yen fell 0.8% against the dollar to 152.01 yen per dollar, its lowest level since October 14, which also helped the dollar index rise to 98.95, a six-day high.
Expectations that Takaichi Sanae may appoint Satsuki Katayama, a supporter of a stronger yen, as finance minister have increased policy uncertainty. Markets are currently cautious as the Bank of Japan faces conflicting fiscal and monetary signals.
Market Outlook: Policy divergence drives bullish sentiment
(Source of US Dollar Index daily chart: Yihuitong)
Thanks to the support brought by policy divergence and the rebound in optimism about US fiscal stability, the US dollar index is likely to maintain a bullish tone before the release of inflation data on Friday this week.
As long as the index holds above its 50-day moving average, the probability of testing the resistance level of 99.5549 will continue to rise. In the short term, overall risk appetite and global interest rate differentials remain favorable for a stronger dollar.
At 00:50 Beijing time, the US dollar index was 99.8780/8930, up 0.27%.
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