Insights 
VT 
The US Dollar rose on Tuesday, approaching six-month highs, amid anticipation of the Federal Reserve’s future actions. Speculation that the Fed might remain constant in December supports the dollar, while the US government shutdown shows no progress towards resolution.
On November 5, the US Dollar Index continued its upward trend, surpassing the 100.00 mark. Anticipated economic data releases include MBA Mortgage Applications, ADP Employment Change, ISM Services PMI, and the EIA’s crude oil stock report.
Euro And Pound Struggles
The Euro dropped below 1.1500 against the dollar, with key German and EU economic indicators forthcoming. Similarly, the British Pound reached multi-month lows as market participants await further data, including the S&P Global Services PMI.
The USD/JPY pair saw declines, moving to three-day lows due to risk aversion, while Japan releases its economic indicators. The Australian Dollar also fell with the strengthening US Dollar following recent Reserve Bank of Australia decisions.
Within commodities, WTI prices hovered around $60.00 per barrel, reflecting supply concerns. Gold fell to near $3,930 per ounce, influenced by the strengthened US Dollar and reduced expectations for a December Fed rate cut, with silver following the downward trajectory.
We are facing a strong US Dollar, which has now pushed through the key 100.00 level on the DXY. This move is fueled by expectations that the Federal Reserve will hold interest rates steady in December, a sentiment reinforced by recent inflation data. The major risk overshadowing this trend is the ongoing US government shutdown, which introduces significant uncertainty.
Interest Rate Dynamics
This strength in the dollar is directly tied to interest rate expectations, with derivatives markets showing a clear picture. The CME FedWatch Tool, as of this morning, indicates that traders are pricing in over a 90% probability of the Fed keeping rates on hold next month. Therefore, we should watch upcoming data like the ISM Services PMI very closely for any signs of economic weakness that could alter this view.
The Euro and Pound are consequently facing heavy pressure, with EUR/USD breaking 1.1500 and GBP/USD falling below 1.3020. Given that recent data showed Eurozone inflation falling to a two-year low of 2.4%, the European Central Bank has little reason to match the Fed’s hawkish stance. This makes short positions on these currencies seem logical, but we should use put options to define risk in case of a sudden dollar reversal.
Interestingly, the Japanese Yen is strengthening against the dollar due to its safe-haven status amid the shutdown fears. This is a direct conflict between the strong-dollar trend and a classic flight to safety, which is compressing USD/JPY. This tension suggests a sharp move is coming, and traders could look at options strategies that profit from a spike in volatility.
Commodities are suffering under the weight of the firm dollar, with Gold falling back to the $3,930 area. A strong greenback makes dollar-denominated assets like gold and oil more expensive for foreign buyers. WTI crude oil is also weighed down by oversupply fears, a concern supported by last week’s EIA report which showed a surprise inventory build of nearly 4 million barrels.
The government shutdown remains the wild card, and we are now approaching the record 35-day shutdown we saw back in 2018-2019. During that period, the VIX volatility index spiked dramatically as the deadline for a resolution drew near. We should consider buying protection, such as calls on the VIX, to hedge our portfolios against a similar surge in market volatility in the coming weeks.
