On Tuesday (October 1), the US dollar index was supported by the Chicago Purchasing Managers Index at 100.70, which was higher than expected. The price of gold fell back to $2,635, down $29 from its high at the beginning of the week, and Bitcoin fell below $63,500. Federal Reserve Chairman Powell released a hawkish tone, saying that he was not in a hurry and would gradually cut interest rates, reiterating that interest rate policy does not follow a preset path. Israel is preparing to launch a ground war in Lebanon, but the United States warns Iran of the risk of direct conflict, and the US military has sent additional troops to the Middle East to prevent Iran from responding.

Israel prepares to launch a "ground war" and the US military sends more soldiers to the Middle East

Israel has blocked its border with Lebanon and is preparing to launch a ground assault on Hezbollah, ignoring international calls for Israel to exercise restraint, Bloomberg reported.

Israel killed Hamas leader Hassan Nasrallah on Friday and the expected strikes will further expand its campaign against the Iran-backed group despite calls for a ceasefire from the United States, the European Union and Arab countries. Israel has shifted its focus to Lebanon, where its war with Hamas in the Gaza Strip has stalled.

The United States expects Israel to launch a limited ground invasion of Lebanon but says it has warned Prime Minister Benjamin Netanyahu’s government against a larger and longer-term operation that would risk a direct conflict with Iran, according to a U.S. official briefed on the matter who spoke on condition of anonymity.

Israel has launched a massive air campaign against Lebanon over the past week, and on Monday said it was ready to send more ground troops, including tanks, to southern Lebanon after striking central Beirut, following months of smaller raids along the border.

Israeli Defense Minister Yoav Galant told tank troops deployed on the border on Monday that killing Nasrallah was not the last step in the fight against Hezbollah, and "we will use all the forces at our disposal."

The IDF also declared three areas in northern Israel - Metulla, Mizgaf Amr and Kfar Giladi - as "no-military zones", another sign of possible military action. Meanwhile, Lebanon's national news agency NNA reported Israeli shelling across the border.

Netanyahu says the crackdown on Hezbollah is aimed at ending rocket attacks by the Iran-backed group that have forced tens of thousands of Israelis to flee their homes in northern Israel. A similar exodus has occurred in southern Lebanon amid Israel's retaliation.

U.S. officials had previously warned Israel against a full-scale invasion of Gaza and withheld a cache of 2,000-pound bombs during the war for fear they would strike civilians. The Israeli military also later seized the Rafah border crossing with Egypt and eventually stationed troops along the Egypt-Gaza border, moves that complicated the ceasefire the U.S. government had been seeking.

"We do not want to see civilian infrastructure in Lebanon targeted," U.S. State Department spokesman Matt Miller said in Washington on Monday, adding that Hezbollah's targets were legitimate.

Meanwhile, the US Department of Defense said the United States was sending "thousands" of troops to the Middle East to bolster Israel's defences and deter an Iranian response.

Sabrina Singh, deputy spokeswoman for the U.S. Department of Defense, said the additional forces, mainly composed of fighter squadrons and troops, will remain in the region longer than originally planned. On Sunday, the U.S. Department of Defense announced that it would strengthen defensive air support in the region in the coming days.

Powell's shocking "hawkish" remarks scared the market

Powell said the Fed will "gradually" lower interest rates, while reiterating that the overall economy remains solid. Powell also reiterated his confidence that inflation will continue to move toward its 2% target, adding that economic conditions "lay the foundation" for further easing price pressures.

"Looking ahead, if the economy generally develops as expected, policy will over time move toward a more neutral stance," Powell said in a speech to the National Association for Business Economics' annual meeting in Nashville. "But we are not on any pre-set course."

He noted that U.S. policymakers will continue to make decisions at each meeting based on incoming economic data.

Neutral policy neither stimulates nor suppresses the economy. The Fed's current benchmark interest rate, which officials cut to a range of 4.75% to 5.0% earlier this month, is widely seen as still restraining economic activity.

The comments left open the crucial question for investors about how policymakers will decide the size and pace of rate cuts in the coming months.

In early September, the Fed cut its benchmark policy rate by 50 basis points, its first and larger-than-usual rate cut since 2020. Officials said the big cut was aimed at protecting a slowing labor market from further weakness.

Powell called the labor market solid but said conditions have cooled significantly over the past year. “We do not believe we need to see further cooling in the labor market to achieve our 2% inflation goal,” he said.

Inflation has been tame in recent months, a trend reinforced by government data last week showing the Fed’s preferred measure of price pressures edged up in August. On a 12-month basis, the personal consumption expenditures price index rose 2.2%. That gave officials more confidence that inflation is moving toward their goal, allowing them to focus more on strengthening the labor market.

Powell mentioned: "Deflation is widespread, and recent data suggest that inflation is moving further toward a sustained return to 2 percent."

Still, some policymakers worry that cutting rates too quickly could reignite inflationary pressures in the economy. “Our goal has always been to restore price stability without causing a large increase in unemployment, which is often associated with efforts to reduce high inflation,” Powell said. “While the job is not done, we have made great progress toward that goal.”

Powell acknowledged that the decline in housing-related inflation has been slow, but he expressed confidence that inflation will slow further over time.

At their meeting earlier this month, officials projected an additional 50 basis points of cuts for the rest of 2024 and a further 100 basis points in 2025, according to median forecasts. However, several officials estimated that the easing would be smaller by the end of this year.

Investors are betting the Fed will cut interest rates by about another 75 basis points this year, according to futures markets, which would imply another big cut in November or December.

A handful of Fed officials have left room for such a move, saying any signs of severe labor market slack could lead to another big rate cut.

Fed Governor Michelle Bowman opposed the recent 50 basis point rate cut in favor of a smaller 25 basis point reduction, stressing that she sees lingering inflation risks. She said the Fed should cut rates at a "measured" pace.

The latest nonfarm payrolls report will be released on Friday, with economists surveyed by Bloomberg expecting employers to add 150,000 jobs in September, consistent with a slowing labor market. The unemployment rate, which has been rising so far this year, is expected to stabilize at 4.2%.

Chicago Purchasing Managers Index "off the charts" supports the dollar

The US Chicago Purchasing Managers' Index in September was better than expected, at 46.6, exceeding the expected 46.2 and better than 46.1 in August.

On Monday, China's Shanghai Composite Index closed up more than 8%, while European and American stock markets performed even worse, with declines across the board.

The CME Group’s Fed Watch tool shows a 60.4% chance that the Fed will cut rates by 25 basis points at its next meeting on Nov. 7, while a 39.6% chance expects the central bank to cut rates by another 50 basis points.

The U.S. 10-year benchmark interest rate is at 3.76%, on track to test a three-week high of 3.81%.

US Dollar Technical Analysis

FXStreet analyst Filip Lagaart said that the biggest problem with the dollar index being unable to get out of its new yearly low of 100.16 is that there is no technical level to trade. Either risky traders will enter the market and possibly push the dollar higher, or they will wait for the next key support level below 100.00 at 99.58.

A retest of resistance is needed this week, and with three-day closes below 100.62, that level is now seen as a solid resistance. If the dollar bulls can turn things around, a second level of resistance on the upside is located at 101.90. Above this, the 55-day simple moving average (SMA) is located at 102.22.

It is time to prepare for further declines, with a new low in 2024 at 100.16 so a test will be made before further declines. Further down, this would mean abandoning the big 100.00 level and the July 14, 2023 low of 99.58 comes into play.

Gold Technical Analysis

FXEmpire analyst Vladimir Zernov said gold prices retreated as traders continued to take profits after strong gains.

The rebound in the US dollar puts additional pressure on the current gold market.

If the gold price falls below the $2,620 level, it will fall towards the nearest support level of $2,580-2,590.

Bitcoin Technical Analysis

CoinTelegraph pointed out that Bitcoin prices fluctuated sharply and fell below $64,000 at the beginning of the week due to selling pressure. According to CoinGlass data, even if the gains are given up, Bitcoin is still expected to record its best monthly gains in September, exceeding the 6.04% increase in 2016.

Traders may be optimistic about Bitcoin heading into Q4 as October was one of the strongest months with an average gain of 22.90% and a median gain of 27.70%. If history repeats itself, new highs could be in the cards in the coming months.

CK Zheng, chief investment officer at ZX Squared Capital, mentioned that the U.S. presidential election in November is another bullish trigger for Bitcoin, as both the Republican and Democratic parties failed to “appropriately address the growing U.S. debt and deficit issues in this election.”

Bitcoin hit above $65,000 before the weekend but failed to push higher, attracting profit-taking by short-term traders, which caused the price to fall back below the breakout level on Monday.

Bitcoin’s 20-day EMA at $62,722 is a critical level that the bulls need to defend. If the price rebounds off the 20-day EMA, buyers will try to push the price above $66,500. If they succeed, Bitcoin could jump to $70,000.

Conversely, a break below the 20-day EMA will indicate that the bullish momentum is fading. Bitcoin could then drop to the 50-day SMA at $60,300. This could keep Bitcoin in the $54,000 to $65,000 range for a while.