US dollar consolidates losses in quiet markets ahead of Jackson Hole

• The US dollar is posting a third straight day of losses, nearly erasing all gains for 2024.
• The greenback eased on a mix of elements as markets await Jackson Hole at the end of the week.
• The US dollar index is trading near dangerous levels, close to turning into negative performance for 2024.

The US dollar (USD) extended losses on Tuesday after being pummeled on Monday, with all eyes on the US Federal Reserve’s Jackson Hole Symposium in Wyoming, where Fed Chairman Jerome Powell is set to deliver a keynote speech. A mix of risk data and a very thin data calendar in the run-up to Jackson Hole convinced traders that a recessionary scenario could be avoided and the US economy was on track for a soft landing. Outside the US, news that Israel may commit to the US ceasefire proposal is also reducing refuge flows to the Greenback.

In terms of economic data, Tuesday again follows a very light calendar, although some kind of caution must be maintained. With all the stars aligned for a weaker US Dollar, any commentary or data point could see an aggressive reversal of Monday’s moves. Given Fed Chairman Powell’s speech on Friday, almost all Fed members will have issued their personal view on the interest rate path, meaning plenty of market-moving comments could still be on the way.

Daily Market Reasons: Comments in progress

• According to Bloomberg, China’s government is considering whether to let local governments issue bonds to buy homes.
• At 12:55 GMT, the Redbook Index for the week ending August 16 is due to be released. The previous reading showed a 4.7% increase over a one-year period.
• In the run-up to Jackson Hole, almost all members of the Federal Open Market Committee (FOMC) will have a window of opportunity to have their say on monetary policy. This Tuesday two members are due to issue comments:
  • Federal Reserve Bank of Atlanta President Raphael Bostic made several remarks at the Atlanta Fed’s Payments Inclusion Forum in Atlanta.
  • Federal Reserve Vice Chairman for Supervision Michael Barr participates in a discussion on cybersecurity at the meeting of the Joint Committee on Financial and Banking Information Infrastructure and the Financial Services Sector Coordinating Council in Washington, DC
• Asian equity markets are mixed, with Japanese indexes up more than 1 percent, while Chinese shares are on the back foot. European and US stocks continue Monday’s positive tone.
• The CME Fedwatch tool shows a 77.5% chance of a 25 basis point (bps) interest rate cut by the Fed in September, compared to a 22.5% chance of a 50 basis point cut. Another 25bps cut (if September is a 25bps cut) is expected in November by 59.3%, while there is a 35.4% chance that rates will be 75bps below current levels and a likelihood of 5.2% for rates to be 100 basis points lower. .
• The benchmark US 10-year yield is trading at 3.87% and looking for direction after last week’s decline.

Technical Analysis of the US Dollar Index: Back to the Drawing Board

The US Dollar Index (DXY) is getting very close to erasing its gains for the full year 2024. This sends dollar bulls back to the drawing board as the risk of this year’s performance turning negative is a potential outcome. With this mix of easing geopolitical tensions and markets once again embracing the soft landing pattern ahead of Fed Chairman Jerome Powell’s Jackson Hole speech, the question is whether markets are getting too far ahead of themselves.

Defining pivot levels becomes very important to avoid any dead cat jumps, where traders pile into a trade too quickly and get caught on the wrong side of the fence once the course reverses. The first rise is 103.18, a level that traders could not hold last week. Next, a strong resistance level is at 103.99-104.00, and inches above is the 200-day Simple Moving Average (SMA) at 104.07.

On the downside, the first immediate support appears at the 101.90 level, which is under pressure at the moment. Highs not seen since early January are emerging and even a new yearly low could come into play once DXY breaks below 101.30 (January 2nd low). The December 28 low at 100.62 will be the ultimate level to watch.

US Dollar Index: Daily Chart