Forex Signal Bullish

Dollar Pressured by Rate Pause Bets, Israeli-Palestinian Conflict Jolts Markets

Dollar Pressured by Rate Pause Bets, Israeli-Palestinian Conflict Jolts Markets

The dollar index held recent losses to trade around 106 on Tuesday, facing pressure from growing expectations that the Federal Reserve will not raise interest rates in November. The greenback’s decline was exacerbated by the ongoing conflict between Israel and Palestinian Islamic Group Hamas, which jolted financial markets on Monday and briefly drove safe-haven demand for the dollar.

Fed Vice Chair Philip Jefferson said the central bank would need to “proceed carefully” given the recent rise in yields, while Dallas Fed President Lorie Logan said there may be less need to tighten further if long-term rates remain elevated. Markets are seeing an 86% chance that the Fed will hold rates steady next month, according to the CME FedWatch Tool.

Investors now look ahead to US inflation data this week to guide the outlook on monetary policy. A cooler inflation reading could further boost bets on a Fed rate pause, while a hotter-than-expected reading could revive concerns about aggressive tightening and support the dollar.

In the meantime, investors continued to monitor the conflict between Israel and Hamas. The two sides have traded airstrikes and rocket fire since Monday, killing dozens of people and raising fears of a wider escalation. The conflict has weighed on risk sentiment and boosted demand for safe-haven assets, such as gold and the Japanese yen.

The dollar’s recent decline is significant, as it comes at a time when the US economy is showing signs of strength. GDP growth rebounded to 6.7% in the second quarter, and the unemployment rate fell to 3.5%. However, the Fed is facing a difficult balancing act, as it tries to combat inflation without slowing economic growth.

The Fed’s decision on whether or not to raise interest rates in November will be closely watched by investors. A rate pause could be seen as a sign that the Fed is becoming more cautious about the economic outlook. This could lead to a further weakening of the dollar and support risk assets. On the other hand, a rate hike would signal that the Fed is still committed to fighting inflation. This could boost the dollar and dampen risk sentiment.

The Israeli-Palestinian conflict is also a key factor to watch in the coming days. A further escalation of the conflict could lead to a flight to safety and support the dollar. However, if the conflict is resolved quickly, it could boost risk sentiment and weigh on the greenback.

Overall, the dollar is facing a number of headwinds in the near term. Growing expectations of a Fed rate pause, the ongoing Israeli-Palestinian conflict, and a stronger yen are all pressuring the greenback lower. Investors should carefully monitor these factors in the coming days, as they could have a significant impact on the dollar’s trajectory.