US Dollar: Here's How to Trade the Greenback With US Election, Fed Decision on Tap

• The U.S. dollar faces uncertainty with elections and Fed decisions ahead.
• Key support at 104 will be vital for the dollar's direction amid rising volatility.
• Election outcomes could significantly impact dollar demand and interest rate policies.
• Looking for actionable trade ideas to navigate the current market volatility? Unlock access to InvestingPro’s AI-selected stock winners for under $9 a month!

The US dollar quickly rebounded from a brief dip following last Friday’s weak employment data. After appreciating against the euro, it continued to strengthen against most major currencies.

However, as the new week began, the greenback opened with a negative gap, giving back some of those gains.

Despite experiencing the lowest increase in non-farm payrolls since 2021, market participants quickly shifted their focus to the upcoming US elections, attributing the poor employment figures to hurricane effects.

This disappointing data appears to support the Federal Reserve's interest rate policy, reinforcing expectations of a 25 basis point cut.

Meanwhile, traders anticipate that the Fed will adopt a slower rate-cutting approach compared to other developed central banks. The uncertainty surrounding the elections may also bolster confidence in the dollar.

This week, the dollar's movements will be heavily influenced by the presidential election, with a tight race between Kamala Harris and Donald Trump.

Polls indicate a neck-and-neck competition and a Trump victory could suggest a future emphasis on dollar-favoring policies, potentially driving up demand for the currency.

Conversely, if Harris wins, her more balanced approach may not spark such an aggressive move in the dollar, but it could help maintain its strength.

In any case, both outcomes support the dollar, especially with data showing robust fundamentals in the US economy.

As the election week unfolds, coupled with the Fed’s interest rate decision, market volatility is likely to increase. This environment will keep a close watch on the dollar index, which will, in turn, impact other markets.

Last Week’s Job Numbers

Last week’s non-farm employment data fell significantly short of expectations, posting only a 12,000 increase in October.

Analysts had anticipated a rise of around 100,000, but factors like hurricanes and labor strikes in the aviation sector hindered performance.

Hurricanes Helene and Milton particularly impacted the Southeast, while strikes at Boeing (NYSE:BA) contributed to the disappointing figures.

Despite this weak employment data, the US unemployment rate remained steady at 4.1%, and average hourly wages rose by 0.4%, exceeding market forecasts.

These indicators reflect a still-solid labor market. The low employment growth has further confirmed the anticipated 25 basis point rate cut from the Fed.

Importantly, the market attributed this shortfall to external factors like hurricanes, which limited any significant negative impact on the dollar.

After the lackluster payroll report, the CME Fed Watch data revealed that the likelihood of the Fed maintaining current interest rates at this week’s meeting dropped to 5.2%, while the expectation for a rate cut soared to 100%.

US 10-year bond yields, which were at 4.32% before the report, dipped to 4.23%, while US stock futures rose by about 0.5%.

US Dollar: Critical Support and Resistance Levels to Watch Ahead of US Elections, Fed Decision

Technically speaking, the dollar index (DXY) moved bearishly in the uncertain environment last week, slowing its upward momentum from the previous week.

After reaching a high of 104.60, the index tested support below the 104 level following the employment data. A swift recovery brought the DXY back to the 104 region, but it started the new week at 103.78, below the crucial support level of 104.

DXY Price Chart

This week, traders should keep a close eye on the 104 level (Fib 0.618) as a key support point. If the DXY can remain above this threshold, we could see a strengthening upward trend following last week's sideways movements.

Conversely, volatility is likely to rise due to significant political developments and macroeconomic data.

If the DXY trends upward, daily closes above 104.50 could signal a move toward the 105 band, with a weekly close above 105 (Fib 0.786) indicating a strengthening trend.

However, if the dollar index slips below the 104 level, the 103.3 band could emerge as a critical second support point to watch closely.

Holding this level during a potential retreat may indicate a limited correction, which could bolster demand for the dollar. Otherwise, we may witness a sharp decline in the index

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Disclaimer: This article is written for informational purposes only. It is not intended to encourage asset purchases or constitute a solicitation, offer, recommendation, or suggestion to invest. All assets are evaluated from multiple perspectives and carry significant risks, so any investment decision and associated risks are the responsibility of the investor. We do not provide investment advisory services.