US Dollar Under Pressure as Powell's Remarks Unveil Bearish Sentiment

Currency markets saw a slight bearish tilt in Powell's remarks on Thursday, causing some weakening in the dollar's support. The dollar index dipped below the 106 level post-speech, but it failed to elicit significant interest from sellers. As a result, the price stabilized on Friday, trading above 106 points. Since the end of last week, the price has clearly been establishing a range between 106 – 106.50, and any breakout beyond this range is likely to be linked to the release of fresh data on the American economy:Markets continue to receive confirmation that the U.S. economy remains resilient despite the pressure from high interest rates. On Thursday, it was employment data that surprised on the downside, with initial jobless claims dropping below the 200K. Nevertheless, the dollar weakened against its major counterparts after Federal Reserve Chairman Jerome Powell's statement that the central bank is proceeding cautiously, and its policy remains somewhat restrictive. Powell's remarks weren't overly dovish, especially given the market's expectations for further actions by the Federal Reserve (only about 10 additional basis points of tightening were priced in before his speech) and recent statements from other central bank officials indicating that rising bond yields reduce the likelihood of further rate hikes.Data from the Commodity Futures Trading Commission (CFTC) as of October 10th showed that the net long position exceeded 10% of the open interest. This is a significant deviation from the long-term average, which means investors may be less inclined to enter medium-term dollar longs even despite strong data releases.Net position on the dollar index: ICE futuresThere are other factors that may help explain the recent dollar decline amid rising yields, with which the dollar usually has a positive correlation. The gap between U.S. 10-year bond yields and swap rates has reached multi-year highs, indicating that markets may start demanding higher yields due to concerns about U.S. fiscal policy sustainability. This week also sees improvements in the macroeconomic data of major counterparts such as the EU and China, shifting investor focus to assets outside the U.S. Another interesting observation could be that the flight from risk amid geopolitical instability hasn't occurred, so the dollar may be experiencing a pullback of positions that essentially bet on the dollar's role as a safe haven asset increasing. The conflict in the Middle East has had surprisingly limited overall market impact. Oil price increases have been modest, and stocks, especially considering the concurrent rise in risk-free rates, have continued to hold up relatively well. Apart from a sudden escalation in the conflict, there remains the risk of a delayed impact on various asset classes. A slight dollar retracement is possible next week, but for now, it's challenging to counter the positive US economic momentum that is seen in the incoming U.S. economic data. As a result, the market may ultimately be inclined to anticipate a retest of the 107 level on the dollar index (DXY). The U.S. calendar is relatively calm today, with two Fed speakers taking the stage who might provide some noteworthy insights: Patrick Harker and Loretta Mester.