08.10.202613:55 Forex Analysis & Reviews: Dollar (USDX) nears 18-month high, but market anticipates October pause

*see also: InstaForex trading indicators for USDX

The US Dollar Index (USDX) is trading around 102.40 ahead of the US session on Thursday, holding close to this week's peak of 102.50, the highest since April 2025. The dollar shows resilience despite a weak jobs report released Friday. The reason is the hawkish FOMC minutes, which confirmed that a majority of committee members expect another interest rate increase before year-end.

Drivers of dollar strength

Hawkish FOMC minutes. Published on Wednesday, the minutes from the September 15–16 meeting showed that a majority of participants judged it likely to be appropriate to raise the target range for the federal funds rate again by year-end. Moreover, several participants said that the current policy rate was either not restrictive or only modestly restrictive. That reinforces the Fed's hawkish tilt even in the face of soft labor market data.

Bond yields remain near multi-year highs. The 10-year Treasury yield is holding around 5.30%, and the 30-year is near 5.70%. That supports the attractiveness of dollar-denominated assets and pressures currencies with lower yields.

Geopolitical tensions. Reports say the Pentagon asked CENTCOM to finish planning for a possible resumption of large-scale operations against Iran, with strikes potentially occurring before the US midterms. That keeps a geopolitical risk premium in place and supports the dollar's safe-haven role.

Energy factor. BBH notes that sustainably high energy prices raise risks to inflation, policy rates, and bond yields, while supporting currencies of energy exporters and the US dollar versus importers' currencies.

Headwinds for dollar

Weak labor market. Friday's NFP showed only 29,000 jobs added in September versus a 90,000 consensus, and the unemployment rate rose to 4.2%. That reduced the odds of an October rate hike: CME FedWatch is currently pricing in an October move at roughly 19%, while a December hike is still seen with better than 85% probability.

Technical overbought conditions. The 14-day RSI is approaching overbought territory on the daily chart, signaling the risk of a correction or consolidation. The D1 stochastic is attempting to exit overbought territory.

Brief technical analysis

The technical picture remains bullish. InstaForex's composite technical analysis (on the daily chart) shows a "Strong Buy" signal: 21 of 23 indicators point to buy, though they also flag overheating.

The index is trading above all key moving averages, confirming a bullish structure. However, the 14-day RSI on the daily chart is around 64–65, near overbought territory. That implies the risk of a correction or consolidation.

Key events to watch

Main question of the week — can USDX hold above 102.00 amid labor market releases? If support holds, a breakout to 102.85 is possible. If the pullback continues, the 101.75 level (200-hour EMA) will become key support.

Today, October 8, at 12:30 GMT, weekly initial jobless claims in the US will be released. The prior reading was 197k; the consensus is 200k. A print below expectations would reinforce labor market resilience and support the Fed's hawkish stance.

Also today, Fed Governor Christopher Waller spoke at 08:30 GMT. Waller said further rate increases are needed, though the pace can be flexible. His comments could provide clues on the policy trajectory.

On Wednesday, October 14, at 12:30 GMT, the September consumer price index (CPI) will be published. That is the key release that will determine whether the odds of a December rate hike stay elevated.

Also, watch the situation in France. The wide spread between French and German bonds remains a key driver of euro weakness and, therefore, dollar strength. ING notes that dynamics in the French bond market may matter more for USDX than domestic US factors.

Conclusion and recommendations

USDX is holding near 18-month highs, supported by hawkish FOMC minutes and elevated bond yields. Key level for bulls: 102.60; for bears: 101.75 (200?hour EMA).

For short-term traders:

• Consider long entries on a sustained break above 102.60, with targets at 102.85–103.30 and a stop-loss order below 102.00.
• Consider short positions on a break below 102.00, with targets at 101.75–101.30 and a stop-loss order above 102.60.
• Monitor US labor data and the CPI (October 14) closely.

For medium-term investors:

• Economists expect some of the dollar's recent gains could be reversed by year-end if energy markets stabilize.
• A potential pullback to the 101.00–100.75 area (200-week EMA) could be used to incrementally add long positions while maintaining a constructive view on the dollar.

Risk management:

• Account for elevated volatility around inflation releases.
• Use strict stop-losses, especially when trading breakouts of key levels.
• Track developments in French bonds and Fed speakers' comments.