US Dollar looks for direction as risk of US government shutdown looms

• The US Dollar trades mixed on Monday as US government shutdown risk escalates.
• In the background traders will be on edge for US GDP numbers later this week.
• The US Dollar Index resides near the six-month highs. 

The US Dollar (USD) confirmed its status as king after a quite volatile week. The US Federal Reserve could not have been more clear and confirmed yet again that rates in the US will stay higher for longer. This puts the US Dollar as the strongest partner in most trading pairs due to interest rate differentials. 

Amidst all the noise on the macroeconomic front, traders did not really care about the US government shutdown until this coming Friday evening. When House Speaker Kevin McCarthy sent all Representatives packing for the weekend last Friday, traders became aware that a deal might again not happen until the final hour. This means some risk premium, on the back of a weaker US Dollar, might emerge as days pass without any hopeful signals from Capitol Hill on a possible deal. 

Daily digest: US Dollar to see GDP hit by strikes

• A very calm start of the week has begun with the Chicago Fed National Activity Index for August being released at 12:30 GMT. The previous number was 0.12.
• The US Dallas Fed Manufacturing Business Index for August is expected to come out near 14:30 GMT and was in contraction at -17.2 for July. 
• The US Treasury will be auctioning 3-month and 6-month bills at 15:30 GMT at elevated rates. 
• A big dispersion in the equity markets shows its face at the start of the week in Asia: Japanese stocks rally with both the Topix and the Nikkei in the green. China, meanwhile, sees Hong Kong’s Hang Seng Index tank near 1.5% as Evergrande cancelled a meeting with creditors to renegotiate terms. European and American futures are down and show signs of risk off, seeing all the current tail risks taking over sentiment.
• The CME Group FedWatch Tool shows that markets are pricing in a 77% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The recent turmoil on Capitol Hill and the United Auto Workers (UAW) strike could force the Fed to keep rates unchanged through the end of the year. 
• The benchmark 10-year US Treasury yield traded as high as 4.69% and resides near the highest level since October 2007. 

US Dollar Index technical analysis: Can it get there?

The US Dollar looks to be stuck in a stalemate with the rate differential keeping the US Dollar holding an advantage against most major G20 currencies. On the other side, the automaker strike in Detroit  and possible US government shutdown could weigh on the Greenback over the short term. The US Dollar Index (DXY) is looking for direction in this difficult environment. 

The US Dollar Index opens up above 105.50 this Monday and shows small signs of possibly going higher. Should the DXY close above the yearly high near 105.88, expect the US Dollar to follow on with more bullish moves in the medium term. US yields and the unwinding of the US strike and government shutdown will remain crucial to support current levels in the DXY. 

On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.