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  • Writer's pictureSieracki Milosz

US Dollar's Struggles and Economic Uncertainty: A Deep Dive

Forex News Today All eyes on US September inflation data

In a tumultuous economic landscape, the US Dollar (USD) is grappling with challenges that have left it struggling to find demand. Early on Thursday, the US Dollar Index was observed edging lower toward 105.50 after enduring six consecutive trading days in the red. This unsettling trend in the value of the USD is reflective of the ongoing uncertainties in the global financial markets, compounded by key economic indicators and policy decisions that have significant repercussions on the currency.

Economic Factors Influencing the USD

Weekly Initial Jobless Claims and the September Consumer Price Index (CPI) data are on the horizon, poised to play a pivotal role in shaping the USD's trajectory. Furthermore, across the Atlantic, the European Central Bank is set to release the accounts of the September policy meeting, adding an extra layer of complexity to the USD's outlook.

Risk Flows and Their Impact on the USD

Risk flows have maintained a stranglehold on the financial markets, particularly during the second half of the previous trading day. This continuous trend has exerted downward pressure on the USD, prompting it to weaken against its currency counterparts. Notably, Wall Street's main indices concluded the day in positive territory, with the benchmark 10-year US Treasury bond yield plummeting below 4.6%. This abrupt decline, erasing over 2% in a single day, is indicative of investor sentiment.

A significant contributing factor to this scenario is the growing expectation that the Federal Reserve (Fed) will keep the policy rate unchanged for the remainder of the year. Dovish comments from policymakers have fueled this sentiment, leading to a correction in US bond yields. Furthermore, the minutes from the Fed's September meeting, revealed late on Wednesday, suggest that policymakers view the risks to achieving their goals as increasingly balanced. This sentiment is counterbalanced by the continued perception of upside risks to inflation, creating a complex landscape for the USD.

EUR/USD: An Upward Trajectory

EUR/USD, one of the most closely watched currency pairs, has continued its upward trajectory. The pair reached its highest level in over two weeks, surging above 1.0630 before entering a consolidation phase. This rise in the euro's value relative to the US dollar underscores the challenges the USD is currently grappling with.

UK Economic Data and the Impact on GBP/USD

In the United Kingdom, the Office for National Statistics (ONS) recently released data indicating that the real Gross Domestic Product (GDP) expanded by 0.2% on a monthly basis in August. This follows a concerning 0.6% contraction in July. However, the picture is not entirely positive, as other data reveals that Industrial Production and Manufacturing Production experienced declines of 0.7% and 0.8%, respectively, during the same period. Interestingly, the GBP/USD pair showed no immediate reaction to these figures and was last seen trading just above 1.2300.

USD/JPY and the Focus on Wage Hike Momentum

Turning our attention to the USD/JPY pair, we observe that it registered modest gains on Wednesday. Despite this, it faces difficulty in pulling away from the 149.00 mark early on Thursday. Bank of Japan (BoJ) board member Asahi Noguchi highlighted a key factor that will be closely monitored in the decision-making process: the momentum of wage hikes. This emphasis underscores the importance of both domestic and international economic factors in shaping the currency markets.

Gold's Rally Amid Falling US Yields

The precious metal, gold, has continued to benefit from the declining US yields and extended its rally on Wednesday. Early on Thursday, XAU/USD continued its upward momentum, with prices approaching the $1,880 mark. The surge in gold prices can be attributed to the inverse relationship between gold and US yields. As yields fall, gold tends to gain appeal as a safe-haven asset.

The Future of the USD: Awaiting Clarity

In the midst of these complex and interconnected factors, the future of the US Dollar remains uncertain. Its value is tethered to a delicate balance of domestic economic indicators, global risk sentiment, and the actions of central banks like the Federal Reserve and the European Central Bank.

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