US Dollar reverses course after weak data, eyes on Fed

• The DXY index retreated to 106.80 after peaking at a high of around 107.00.
• The ISM Manufacturing PMI from October came in lower than expected, as well as the ADP employment change.
• Markets await the Fed decision later in the session.

The US Dollar (USD) moved higher on Wednesday, with the DXY Index rising to a nearly one-month high above 107.00 before settling at 106.80. The Dollar price dynamics were set by soft economic data from the US and falling US bond yields, which declined after the US Treasury announced a lower-than-expected refund. Still, a cautious market mood ahead of the Federal Reserve (Fed) later in the session keeps the Greenback afloat.

The focus is on the United States' economic situation as markets await data to continue modeling their expectations on the next Federal Reserve (Fed) decisions. However, the probability of a 25 basis points increase in December, as per the CME FedWatch tool, remains slim, dampening the USD's potential for significant gains. At Wednesday's meeting, a pause is priced in. The Fed is expected to announce a hawkish hold as in September, pointing out that they will remain data-dependent but leaving the door open for further tightening if needed. 

Daily Digest Market Movers: US Dollar retreats from one-month high after weak labor and economic activity figures

• The US DXY index traded in the 106.80 - 107.10 range on Wednesday.
• The US labour market is displaying signs of weakness ahead of Friday’s Nonfarm Payrolls from October.
• The Automatic Data Processing Inc. (ADP) reported that Employment Change fell short of expectations in October. The private sector added 113,000 jobs vs the 150,000 expected but accelerated compared to its last reading of 89,000.
• On the economic activity front, The Institute for Supply Management (ISM) reported that its Manufacturing PMI printed at 46.7 in October,below the 49 expected, and declined from its previous reading of 49.
• Meanwhile, US government bond yields are falling sharply, with the 2, 5 and 10-year yields declining to 5.01%, 4.72% and 4.79%, respectively, contributing to the USD loss of momentum.
• According to the CME FedWatch Tool, the odds of a 25 basis points hike in December are still low, around 20%. Chair Powell’s presser and the policy statement will likely impact those expectations.

Technical Analysis: The US Dollar Index still holds the 20-day SMA with a limited bullish momentum

Observing the daily chart, signs of bullish exhaustion are apparent for the DXY Index. The Relative Strength Index (RSI) exhibits a flat slope above its midline, while the Moving Average Convergence (MACD) histogram displays red bars. As for now, the pair is above the 20,100 and 200-day Simple Moving Average (SMA), indicating a favorable position for the bulls in the bigger picture, but if the bears manage to breach the 20-day average, more downside will be on the horizon.

Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances: 106.90, 107.00, 107.30.