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Dollar index dives to key near term support and Fed cut bets surge

Bets on a rate cut by Fed at the September meeting surged overnight, driven by unexpectedly poor ISM services data. This shift in sentiment also propelled S&P 500 and NASDAQ to new record highs while driving down the 10-year yield and weakening Dollar.

Fed fund futures now indicate nearly 74% chance of a rate cut in September, up significantly from around 62% a week ago.

The change in expectations has led to steep decline in Dollar Index, although it is still too early to call for near-term bearish reversal. DXY found some support at 105.12, as well as 55 D EMA (now at 105.12), and managed to recover, closing at 105.40. A strong bounce from the current level, followed by break of 106.13, could resume the overall rise from 100.61 through 106.51.

However, firm break below 105.12 and 55 D EMA would suggest that the pattern from 106.51 is extending, with the fall from 106.13 as the third leg. Even if the pattern from 106.51 is corrective, deeper decline to 103.99 support and below could be likely.

The upcoming release of the non-farm payroll report tomorrow, along with the US market reopening after the July 4 holiday, will likely provide further clarity on Dollar’s next move.

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