The next downside comes at 99.57

• The US dollar index falls for the second week in a row.
• Disinflationary trends in the US remained firmly established in August.
• The Fed is widely expected to cut rates by 25 bps next week.

The pessimism surrounding the US Dollar (USD) intensified in the latter part of the week, sending the US Dollar Index (DXY) back into negative territory for the second time in a row on the weekly chart.

A look at the DXY price action so far in September signals a fairly decent resistance area just below the 102.00 barrier, although the broader bearish outlook is expected to remain unchanged, while below the critical 200-day SMA at 103 ,85.

The weekly decline was driven mainly by investors’ adjustments to the most likely 25 basis points (bps) cut to the Federal Reserve’s (Fed) Fed Funds target range (FFTR) at its September 18 meeting.

Meanwhile, concerns about a potential “hard landing” for the US economy appear to have dissipated for now.

The decision is made: there will be a 25 bps rate cut

Despite the fact that the start of the Fed’s easing cycle has never been discussed, the size of the first interest rate cut has been under persistent debate in recent weeks.

Until last Wednesday, in fact, following the release of the August Mixed Non-Farm Payrolls on September 6, investors’ attention turned to inflation. In this regard, the release of US inflation data as measured by the Consumer Price Index (CPI) on Wednesday showed further confirmation that disinflationary pressures remained good and solid in August.

Also around inflation, a report from the New York Federal Reserve on Monday indicated that the US public’s expectations of inflationary pressures remained largely unchanged last month, even as current price pressures continued to ease. The latest survey of consumer expectations by the New York Fed showed that in August, respondents expected inflation to be 3 percent a year from now and 2.8 percent five years from now, in line with levels reported in July. The survey also showed that respondents expected inflation to be 2.5% three years ago, up from 2.3% in July.

In fact, and despite a small increase in the greenback shortly after the CPI release, market participants began to unwind their dollar positions, putting the DXY under increasing pressure and causing it to fall from again below the key support of 101.00 towards the end of the period. week.

It’s worth remembering that Fed Chairman Jerome Powell opened the door to interest rate cuts in his speech at the Jackson Hole Symposium in late August, a view that was later reinforced by other Fed policymakers: Federal Reserve Chairman of Atlanta, Raphael Bostic, warned that high interest rates could hurt employment. San Francisco Fed President Mary Daly has suggested cutting interest rates to maintain a healthy labor market, but the extent of cuts will depend on future economic data. New York Federal Reserve Bank President John Williams suggested that a more balanced economy created the possibility of interest rate cuts, with the exact course of action depending on future economic performance. Finally, Fed Governor Christopher Waller and Chicago Fed President Austan Goolsbee called for more interest rate cuts to support full employment and bring wage growth in line with the inflation target of 2 %.

According to CME Group’s FedWatch tool, there is about a 57 percent chance of a quarter-point interest rate cut in September, while the probability of a 50-basis-point cut is about 43 percent.

After the anticipated interest rate cut in September, market participants are expected to shift their focus to assessing the performance of the US economy to better anticipate any future rate cuts.

Investors have currently priced in about 250 basis points of easing over the next twelve months. While earlier concerns about a recession appear to have subsided, future economic data could continue to influence the Fed’s monetary policy decisions.

Outlook on International Monetary Policy: What’s Next?

The Eurozone, Japan, Switzerland and the United Kingdom are facing increasing deflationary pressure. In response, the European Central Bank (ECB) implemented its second interest rate cut on Thursday and maintained a cautious stance on any potential move in October. While ECB policymakers remain uncertain about further interest rate cuts, markets are already pricing in two more cuts this year.

Similarly, the Swiss National Bank (SNB) surprised markets with a 25 basis point cut on June 20, and the Bank of England (BoE) followed with a quarter-point cut on August 1. Meanwhile, the Reserve Bank of Australia ( RBA ) took a different approach, keeping rates unchanged at its August 6 meeting, while sticking to a dovish narrative in subsequent comments. Market expectations suggest the RBA could start cutting rates sometime in Q4 2024.

Instead, the Bank of Japan (BoJ) took markets by surprise on July 31 with a driver move, raising rates by 15 basis points to 0.25%. Despite the recent demanding tone from some BoJ officials, money markets are seeing just 25 basis points of tightening by the central bank over the next 12 months. At its meeting next Friday, the central bank is expected to keep rates unchanged.

When politics meets economics

As of the last US presidential debate, Democratic Party presidential candidate and US Vice President Kamala Harris appears to be leading the run-up to the upcoming November 5 US election by a narrow margin over Republican candidate and former US President Donald Trump. trump card It is important to consider that a second Trump administration, along with the possible reinstatement of tariffs, could disrupt or even reverse the current disinflationary trend in the US economy, potentially leading to a shorter period of Fed rate cuts. Instead, some analysts say a Harris victory could lead to higher taxes and increased pressure on the Fed to ease monetary policy if economic growth starts to slow.

What’s happening next week?

The Fed meeting will be the key event to watch next week. Meanwhile, the release of retail sales data for August will also play an important role, providing further insight into consumer spending trends. In addition, data on industrial production, the Philly Fed Index and the usual weekly jobless claims will provide more clues on the overall health of the US economy.

Technicals on the US Dollar Index

The chances of continued downward pressure on the US Dollar Index (DXY) have increased after it decisively broke below the important 200-day simple moving average (SMA), currently positioned at 103.85.

If the bearish momentum continues, DXY could first target the 2024 low of 100.51 recorded on August 27, and then the psychologically important level of 100.00. Further south comes the 2023 low of 99.57 seen on July 14th.

Bullish attempts should meet immediate resistance at the September high of 101.95 seen on September 3, before the weekly high of 103.54 on August 8 and the critical 200-day SMA.

The daily Relative Strength Index (RSI) has returned to the sub-40 region, accompanying bearish price action in the index.