On Friday, October 23, the US dollar index fluctuated around 101.70, retreating from last week's high of around 102.95. The market is entering a crucial window before the Federal Reserve's policy meeting on October 27-28. Pricing from the meeting suggests a dominant probability of interest rates remaining in the 3.75% to 4.00% range, but related data indicates the Fed faces the strongest pressure to raise rates among G10 central banks. TD Securities strategists pointed out that the foreign exchange market still holds significant long dollar positions ahead of the meeting, at historical standard deviation levels. Meanwhile, the yield on 10-year US Treasury bonds is around 4.97%, with real yields trading in the 2.6% to 2.8% range. Equity markets are increasingly focused on the returns on AI-related capital expenditures, creating a backdrop of multiple intertwined variables.

Long positions in the foreign exchange market and pressure from Federal Reserve policy

TD Securities strategists observed that despite the market pricing in unchanged interest rates at the upcoming Federal Reserve meeting, the foreign exchange market still maintains meaningful long positions in the US dollar. Strategists stated that while the dollar has gradually retreated from last week's peak, aggregate long positions remain near historical standard deviations. Further data shows that the Fed faces the highest pressure to raise interest rates among G10 central banks. Fed Chairman Kevin Warsh recently stated at a related conference in Bangkok that he does not prejudge the meeting's outcome, emphasizing that he will not give clear signals before the meeting and reiterating the price stability goal. Warsh also mentioned that the surge in AI-related investment constitutes a near-term demand shock, the path of which may be volatile, but it is expected to improve productivity in the long term. This statement is consistent with observations of inflation resilience under the current policy framework, and the market still places some weight on further adjustments in December.

Technical Analysis of the US Dollar Index

The daily chart for the US Dollar Index shows the Bollinger Bands' middle band around 101.6392, the upper band at 102.8722, and the lower band at 100.4061. The current price is around 101.70, with a recent high marked at 102.9400 and a low around 101.4390. The MACD indicator shows a DIFF value of 0.3153, a DEA value of 0.4555, and a MACD histogram value of -0.2803, indicating negative territory. The price has recently retreated from its highs, trading near the middle band and short-term moving averages, with relatively narrower volatility compared to the previous period. Indicators show momentum below the zero line, but without extreme deviations from historical ranges.

Midterm elections and year-end seasonal factors

TD Securities strategists point out that the US dollar strengthens ahead of the midterm elections as the probability of a "blue wave" rises, similar to 2018. Current forecasting market data shows a 67% to 72% probability of Democrats controlling both houses of Congress. Strategists believe that a easing adjustment may occur after the event risks are released, coupled with the seasonal weakness of the dollar at the end of the year. The US midterm elections are scheduled for November 3rd, and the time window from the elections to the end of the year overlaps with historical seasonal patterns. Strategists further mention that the adjustment space is more substantial than before the event.

Other catalysts: yields and equity markets

The yield on 10-year US Treasury bonds has recently hovered around 4.97%, with real yields ranging from 2.6% to 2.8%, a slight decline from previous highs. TD Securities strategists cite the potential decline in real yields following the formation of a bottom in Treasury bonds as one of the potential catalysts for a pullback in the US dollar relative to G10 currencies. Meanwhile, strategists mention the potential relative weakness of US equity markets compared to other regional markets due to concerns about AI growth. Related reports indicate that AI-related stocks have a high concentration of contribution to index returns and earnings growth, with substantial capital expenditures, leading to increased market focus on the sustainability of returns. These factors, along with long positions and the election, form a framework for observation and are logically interconnected, but their specific transmission still depends on subsequent data releases.

Frequently Asked Questions

Question 1: What is the current level of USD holdings in the foreign exchange market? Answer: TD Securities data shows that aggregate USD long positions are near historical standard deviations, which remains significant before the meeting. Question 2: What is the market pricing for the Fed's October meeting? Answer: Pricing is mainly focused on maintaining the 3.75% to 4.00% range, but data shows it faces the highest pressure to raise rates among the G10. Question 3: What is the relationship between the midterm elections and the seasonality of the USD? Answer: Strategists point out that the USD strengthens as the probability of a "blue wave" increases, and this may overlap with the seasonal weakness at the end of the year after the event.