DXY: Funding premium, divisive Fed – OCBC

US Dollar (USD) continued to drift higher, taking cues from a divisive Fed, OCBC's FX analysts Frances Cheung and Christopher Wong note. DXY last at 99.96 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note.

2-way trades likely to persist, with bias to upside

"Goolsbee said he is not decided going into Dec meeting and he is nervous about the inflation more than the job market. He added that he still believes interest rates can come down a 'fair amount' but 'it would probably be most judicious to have the rates come down with inflation'. Meanwhile Cook said that risk to labor market outweighs inflation risk but stopped short of indicating if she supports another cut in December FOMC. Daly said she agreed with Fed’s decision to lower rate for the second time in a row but said that Fed should 'keep an open mind' about the possibility of another cut at the next FOMC in December.

"We reiterate our view that absence of US data due to government shutdown as well as a less committal and divisive Fed will likely allow for USD short squeeze to transpire in the near term. Given dovish pricing for 2026, continued pare back in expectations may add to further USD upticks in the interim. Also, funding squeeze raises the cost of shorting USD, and this is another tailwind adding to USD rebound. But when funding situation normalizes, the squeeze may reverse, and USD strength can fade."

"Daily momentum is bullish while RSI rose towards near overbought conditions. 2-way trades likely to persist, with bias to upside. Resistance at 100.50/60 levels (200 DMA, 76.4% fibo). Support at 99.80 (61.8% fibo), 99.10 levels (50% fibo retracement of May high to Sep low), 98.40 (38.2% fibo). On data overnight, ISM manufacturing slumped further into contractionary territory. This week brings ADP employment change, ISM services (Wed). Payrolls data initially scheduled for Fri will likely be deferred until BLS announces details. Markets are expected to scrutinize Fedspeaks and US corporate earnings to get a sense of economy well-being."