US Dollar extends gains as interest-rate cut bets spread to other major central banks

• The DXY US Dollar Index continues to rally for a third straight day.
• Traders will assess US ADP Employment Change and Trade Balance data. 
• The US Dollar Index could close above 104.00, on track to return to October levels.

The US Dollar (USD) is entering a third straight day of gains measured by the US Dollar Index (DXY). Although US yields are retreating, the rate differential with other countries and their currencies is getting wider because markets  are starting to price in quicker and bigger cuts in other countries than what is foreseen for the US Federal Reserve. On Wednesday, traders will keep a close eye on the Euro against the US Dollar cross (EUR/USD) as a crucial 1.0770 level might open up room for the pair to move towards 1.0600 in the short term. 

On the economic front, traders will look for insights from the ADP Employment Change for November. Although markets know that the number holds no correlation with the US Jobs report on Friday, a beat on expectations could trigger another batch of strength for the Greenback. Apart from ADP data, the US Goods Trade Balance could add some more fuel to the move. 

Daily digest: ADP on the wire

• At 12:00 GMT, the Mortgage Bankers Association will release its weekly Mortgage Applications Index. Previous was at 0.3%, with no forecast pencilled in. 
• At 13:15 GMT, the ADP Employment number for November is expected. Previous was at 113,000, and a slightly higher 130,000 is expected.
  • US Trade Balance data for October is due at 13:30 GMT:
  • Goods and Services Trade Balance is expected to head from $61.5 billion deficit to $64.1 billion deficit.
  • The Goods Trade Balance was at a deficit of $89.8 billion in September, with no forecast pencilled in.
  • Nonfarm Productivity for the third quarter, due to be released at 13:30 GMT, is expected to tick up from 4.7% to 4.9%.
  • Unit Labor Costs for the third quarter is expected to decline 0.9%, slightly more than the 0.8% contraction seen in the second quarter.  
• Equities are trying to turn the tide on their negative performance for December. All indices are up across the globe, with Asian equities rallying over 1%. 
• The CME Group’s FedWatch Tool shows that markets are pricing in a 99.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.  
• The benchmark 10-year US Treasury Note drops to 4.17%. Yields in Europe are falling even quicker. 

US Dollar Index technical analysis: Not back yet

The US Dollar trades around 104.00 and looks set to head into a third straight day of gains. Although yields are declining in the US, they are falling even quicker in Europe and other countries, which means that intrinsically the US Dollar is valued higher in terms of return than most of its peers. This rate differential, which persists even in a declining-rate-environment, could see the US Dollar Index (DXY) head back to levels near 105.00-106.00.

The DXY broke the high on Monday and closed off near 103.54 on Tuesday. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 55-day and 100-day Simple Moving Averages (SMA) turned over to support levels. 

To the downside, the 200-day SMA shouldact as support and not allow the DXY to drop below 103.57. If it fails, the lows of June make sense to look for some support near 101.92. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.