The reaction to Powell seemed a bit over the top from the start – ING

A round of risk aversion is hitting the currency market this morning as China’s earnings season failed to provide any real support to Asian stocks and the impact of Friday’s speech by Federal Reserve Chairman Jay Powell fades. The DXY dollar index has recovered modestly since the start of the week, largely due to weaker EUR/USD, and it can probably be argued that another small leg higher in the greenback against pro-cyclical peers is now warranted, notes Francesco Pesole, ING’s FX strategist. .

DXY may break and find support above 101.0

“After all, OIS pricing in 100 basis points of easing by the end of the year means markets are positioned for a soft landing, along with no more increases in inflation. And while Powell’s explicit guidance on rate cuts carries some meaning, investors fully anticipated the rate cut long before Jackson Hole, and the USD’s negative reaction to the speech seemed a bit over the top from the start.

“To be clear, we are not calling for a big dollar rally at this stage. Falling USD rates have made the note significantly cheaper to short, and the general dollar weakness is entirely consistent with Fed easing prospects being conveyed to asset markets. However, risks from a technical perspective and rate differentials are arguably more balanced and, in the very near term, slightly to the upside for the USD.”

“We discussed yesterday how another major decline in the dollar could force markets to fully accept the possibility of a US recession, so perhaps the lack of US Tier 1 data this week is good news for the dollar. The day’s only event is a speech by the Fed’s Raphael Bostic, who is generally considered hawkish and may not push the easing narrative much further. DXY may break and find support above 101.0 in the next couple of days.”