Dollar Index Is gaining Strength, Will It Continue To Move Higer?

Forex traders are in a frenzy as the US dollar index continues to rise, and for the past three days, we have witnessed the index gaining more strength. The question for traders is whether the index will continue to gain strength, and if so, what does this mean for the EUR-USD currency pair?

Why has the dollar index been moving higher?

There are several factors contributing to the current momentum. Firstly, the momentum for the dollar index started when the Fed Chairman delivered his comments last week, during which he said that traders should not expect the Fed to cut the interest rates by 50 basis points, which they did last month. The Fed began the process of cutting interest rates because inflation readings have become more reasonable and economic growth has been stable. There were concerns that the US labor market is weakening, and the Fed will have to take some aggressive measures to avoid a hard landing for the US economy. When the Fed reduced interest rates by 50 basis points, traders referred to it as a desperate move. Their actions led traders to believe that the Fed would continue to cut interest rates in a similar manner. However, their comments suggested that market players should not anticipate such a move, given the Fed's reliance on data. This, in turn, led to a surge in the dollar index, which was unfavourable for the EUR-USD pair.

The second reason for the resurgence of the dollar index's strength is the escalation in geopolitical tensions, specifically the retaliatory attack by Iran on Israil which has increased geopolitcal tensions. The escalation of geopolitical tensions, particularly the retaliatory attack by Iran on Israil, prompted traders to flee for safety. In times of extreme geopolitical tensions, such as the ones we are currently experiencing, investors tend to hold onto the dollar, leading to an increase in demand for the greenback, which in turn strengthened the dollar index. The pending action from Israil, coupled with its stated intention to act harshly, has heightened traders' anxiety. Depending on how big the reaction from Israil is and how significant its impact is, traders are looking at the dollar index as a buying opportunity if it weakens. This means that if we see any strength coming for the EUR/USD, the price is likely to move back to the downside.

The third reason we've seen strength in the dollar index is because of the fresh US ADP reading that came out today. Before the data, the expectation was that we would see the US ADP number drop off the cliff. However, the number surprised investors, as the private employment number was much better than the expectations. The actual number came in at 143K, while the forecast for this number was for 124K, and the previous reading was at 103K. This means that the Fed's recent action has restored confidence in the private employment market, and it also means that the Fed doesn't need to act so aggressively towards their next interest rate cut.

However, this is only half picture as the main economic number that matters the most for the US labour market will be released on Friday and that is your US NFP data. If the number comes in stronger than the expectations, then we could see more strength coming for the dollar index which will be not so positive for the EUR-USD. On the other side, if the number comes weak and fails to beat the expectations, then we could see some serious weakness creeping for the dollar index which would be positive for the Euro.