US dollar resumes weakness ahead of Powell’s pivotal Jackson Hole speech

VaselineAugust 23, 2024

0 5 minutes read

US dollar resumes weakness ahead of Powell’s pivotal Jackson Hole speech

The US dollar is heading south after snapping a recent sell-off on Thursday.
All eyes are on Fed Chairman Jerome Powell, who is expected to meet market expectations for a rate cut at Jackson Hole.
The US Dollar Index is trading just above 101.00 and facing a substantial technical position on the weekly chart.

The US dollar (USD) softened on Friday, trying to hold on to Thursday’s gains after economic data and Fed speakers provided a much-needed boost to the greenback. Kansas City Federal Reserve Bank President Jeffrey Schmid said he was cautious about the market’s current expectations for big interest rate cuts, and upbeat US Purchasing Managers’ Index (PMI) numbers showed a services sector resistant. The end of the week will be led by the speech of the chairman of the US Federal Reserve, Jerome Powell, in Jackson Hole. Much has been written and debated about what Powell will say: Markets expect him to open the door to rate cuts in September, but Powell may not commit to saying when or how much he will cut Fed.

On the economic data front, it will be all about the Fed. Three other Fed members will speak on financial news outlets such as CNBC and Bloomberg Television before and after Fed Powell’s speech to guide markets and modify communication if they see market moves that could indicate a misinterpretation by the markets.

Daily Market Reasons: Say It Best By Saying Nothing

Jackson Hole Program at Jackson Hole:
- At 12:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic will speak on CNBC. An hour later, at 13:00 GMT, he will speak again on Bloomberg Television.
- At 14:00 GMT, Fed Chairman Jerome Powell will speak at the Jackson Hole Symposium. His speech will be released at that time. So any market movement will probably already have happened before Powell even says a word on stage.
- Federal Reserve Bank of Philadelphia President Patrick Harker will comment at 15:00 GMT on Bloomberg Television to guide markets.
- Federal Reserve Bank of Chicago President and CEO Austan Goolsbee will try to guide markets toward the closing bell with additional commentary and guidance at 16:30 GMT on CNBC, followed by comments around 17:45 GMT on Fox and from new at 18:15 GMT on Bloomberg Television.
At 14:00 GMT, new home sales are due, but that number is expected to be overshadowed by Fed Chairman Powell’s speech. Previous sales fell 0.6 percent in June, with no forecast available for the July number.
Overall, stocks aren’t really spooked by Fed Chair Powell’s upcoming keynote speech and are still moving forward. Asia is set to close this week on a positive note, Europe is also posting green numbers and US futures are even more bullish.
The CME Fedwatch tool shows a 75.5% chance of a 25 basis point (bps) interest rate cut by the Fed in September, compared to a 24.5% chance of a 50 basis point cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 51.1%, while there is a 41.0% chance that rates will be 75 bps below current levels and a likelihood of 7.9% for rates to be 100 basis points lower. .
The benchmark US 10-year yield is trading at 3.85%, just below this week’s high of around 3.90%.

Economic indicator

Fed Chairman Powell’s speech

Jerome H. Powell assumed office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to serve an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to be the next chairman of the Federal Reserve. Powell assumed the position of president on February 5, 2018.

Technical Analysis of the US Dollar Index: Is It All in It?

The US Dollar Index (DXY) has the potential to move substantially this afternoon. Very high expectations that Fed Chairman Powell will confirm that interest rate cuts are on the way is the minimum base case in market expectations. Short of that, some substantial dollar bids could come, with the DXY moving higher, while verbal confirmation of a rate cut in September and by as much would see the DXY flirting with a break below 100.00 .

For a recovery, DXY has a long way to go. First, 101.90 is the level to claim. A steep 2% rally would be needed to bring DXY to 103.18 from where it is now trading around 101.00. A very high resistance level near 104.00 not only holds key technical value, but also carries the 200-day simple moving average (SMA) as the second heavyweight limiting price action.

On the downside, 100.62 (December 28 low) will be the next vital support to avoid another crisis. Should it break, the July 14, 2023 low at 99.58 will be the ultimate level to watch.

US Dollar Index: Daily Chart

US Dollar FAQ

The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of a significant number of other countries where it is found in circulation alongside local banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions . QE usually leads to a weaker US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineAugust 23, 2024

0 5 minutes read