05.10.202223:26 Forex Analysis & Reviews: A rematch. The dollar remains dominant

The markets are seeing nothing less than a revenge of the dollar, whose correction has been somewhat delayed and deepened recently. Fleetingly, even thoughts about starting shorts on the US currency appeared, but no. It is curious how the euro and the pound will now behave, which have slightly fledged, hinting at a recovery. It's time to pass the test.

By the end of the week, it will become clear whether the dollar continues its upward trend or whether it is still worth thinking about the end of the rally and the passage of the peak growth. To do this, traders must evaluate the statistics on the labor market.

Employment in the US private sector rose slightly stronger than expected in September, which helped the dollar index to turn around. As ADP data showed on Wednesday, the employment rate rose by 208,000 against the forecast of 200,000. The August growth was 185,000. Despite the increase in interest rates, demand in the labor market remains stable. This again changes the plans of investors, who earlier this week decided to bet on a more dovish approach from the Federal Reserve.

Judging by the latest figures, the US central bank has no reason to hold back in November. The aggressive fight against inflation by means of large-scale rate hikes is likely to continue. Market players are once again convinced of this, but at times they continue to be stubborn.

"The last couple of days have been essentially a bear market rally and investors will have to desperately capitulate before the situation can be seen to stabilize," commented Spartan Capital analysts.

The dollar index gained more than 1% during the hours of the US session. Breakdown of short-term resistance levels around 111.07 and 111.70 will be the first signal that the dollar will return to growth. If so, then bulls will go further towards more than 20-year highs near 120.00, and then 121.00.

Meanwhile, a signal for short positions will be a confirmed breakdown of support at 110.20 on the index.

It is worth noting that the current downward correction of the dollar caused concern and not without reason. Volatility has been on the rise, with a range of over 4% over the past almost two weeks. Whether this corrective wave has ended will be clear at the end of the week, after market players see fresh NFP numbers.

In essence, the dollar is now a reminder that it remains the asset of choice in the current complex and uncertain environment in the global environment. In addition, the prospect of even higher Fed rates looms.

"It's too early to expect a significant dollar pullback in the short term," Rabobank strategists said.

Pound and euro

The pound has recently shown the strongest growth, becoming the most spectacular currency of the past week, but this is in the past. The British currency that now looks the most vulnerable during the reversal of the dollar. A deeper rollback may occur for sterling than the euro.

The GBP/USD pair fell by 1.7% during Wednesday's US session. The fall in the EUR/USD exchange rate exceeded 1%.

"We are in favor of a selling rally in EUR/USD and remain bullish on the dollar, keeping EUR/USD 1 to 3 month target at 0.9500," market strategists at Rabobank write.

Fed spokesman Philip Jefferson said in his first speech on Tuesday that the fight against inflation will take some more time and the central bank intends to take further necessary steps. Thus, the market was given a signal about another rate hike by 75 basis points in November.

"Fed officials continue to beat their hawkish drum and the dollar's key momentum remains intact," Capital Economics said.

"The simple fact is that the recent strengthening of the US dollar is an export of US inflation to the rest of the world, causing enormous economic hardship. Our currency is your problem. This is now more relevant than ever," they say in Nomura.

Until the Fed signals its willingness to slow down its rate hike cycle to ease the pressure, the dollar will remain dominant.