Forex Today: US Dollar retreats following NFP-inspired rally

Dollar rally may face challenge

The greenback gained strength following last Thursday's sharp decline in US equities, driven by a surge in technology stocks. This rally has been particularly noticeable in higher beta currencies, such as the Australian dollar, Swedish krona, Norwegian krone, and Korean won, which have all experienced significant declines since last Wednesday's close.

However, the impact of the equities selloff on FX volatility has been limited, with markets still uncertain about the implications of the Democratic takeover of Congress on regulatory risks related to AI-related investments and the possibility of a broader downturn in the tech sector. Consequently, the dollar's ascent appears to depend on the persistence of a risk-off sentiment this week.

If this mood does not continue, there is a moderate correction risk, as Friday's move may have been overly stretched relative to short-term market factors. Despite this, the macroeconomic narrative should help maintain the DXY above its recent lows of 101.1. The upcoming October US CPI data is expected to be in line with expectations, with both headline and core inflation slowing to 0.3%.

This should reinforce expectations for a December Fed rate hike. Additionally, oil prices have stabilized near $100 per barrel, maintaining some geopolitical risks due to ongoing peace negotiations in the Gulf and uncertainty surrounding the impact of recent US and Israeli political developments.