Other losses are still on the cards

• The US dollar index (DXY) fell to 13-month lows near 100.60.
• Chairman Powell favors an interest rate cut next month.
• Investors’ attention is now turning to the release of PCE inflation data.

The next significant support lines up at the 100.00 level

Market participants continued to punish the greenback so far this week, sending the US Dollar Index (DXY) to new 2024 lows near 100.60 as the week came to a close.

Continued selling pressure stemming from the growing likelihood of the Federal Reserve (Fed) beginning its easing cycle in September kept the US dollar on the back foot amid a patchy performance in US yields, while some comments from the that set the Fed rates contributed to the selling frenzy.

A rate cut in September is a no-brainer. The focus is now on the economy

Bets for the Fed to cut interest rates next month have remained elevated so far this week. That view also appeared to be consistent with that of some Fed officials.

Indeed, Kansas City Fed President Jeff Schmid, known as one of the bank’s most outspoken members, noted that he is closely monitoring the factors contributing to rising unemployment and will base his decision on data to determine whether to support . a rate cut next month.

His counterpart, Boston Fed President Susan Collins, suggested the Fed may soon be ready to initiate a rate-cutting cycle, indicating her potential support for a rate cut at the central bank’s policy meeting next month.

Similarly, Philadelphia Fed President Patrick Harker has expressed his willingness to support an interest rate cut in September, provided the data meets his expectations. Harker noted that, barring any unexpected changes in the data, he believes it is time to begin the process of lowering rates.

Finally, Chairman Jerome Powell’s perspective emerged at the Jackson Hole Symposium, where he expressed explicit support for interest rate cuts, saying further cooling of the labor market would be undesirable. He expressed confidence that inflation is approaching the bank’s 2 percent target.

Powell emphasized that the Fed did not seek or welcome further easing of labor market conditions and assured the crowd that it would do everything possible to support a strong labor market as it moves toward price stability. He also indicated that with the right adjustment of policy restraint, there are good reasons to believe that the economy could return to 2% inflation while maintaining a robust labor market.

So far, CME Group’s FedWatch tool sees a 65% chance of a 25bps rate cut in September, with 35% expecting a 50bps cut.

All in all, if we move away from the more than likely September rate cut, investors are expected to start assessing the performance of the domestic economy. Despite earlier recession concerns appearing to have dissipated, upcoming public data has the potential to affect the monetary policy dial, particularly on the likely size of the impending rate cut.

What is the outlook for monetary policy abroad?

Meanwhile, the European Monetary Union (EMU), Japan, Switzerland and the United Kingdom are facing increasing disinflationary pressures. In response, the European Central Bank (ECB) cut interest rates by 25 bps in June and maintained an accommodative stance in July, with policymakers still uncertain about further rate cuts after the summer, despite investors having already considering two additional cuts later in the year.

Similarly, the Swiss National Bank (SNB) unexpectedly cut interest rates by 25 bps on 20 June, while the Bank of England (BoE) cut its policy rate by a quarter point on 1 August. Instead, the Reserve Bank of Australia (RBA) took a more aggressive approach, keeping rates steady at its August 6 meeting, with investors expecting the bank to begin its easing cycle in the first quarter of 2025. On the other hand, the Bank of Japan (BoJ) surprised the markets on July 31. by issuing a driver message and raising rates by 15 bps to 0.25%.

What about politics?

Since Kamala Harris became the Democratic Party’s presidential nominee for the November election, the polls are now pretty split on the potential outcome. However, it is important to consider that another Trump administration, along with the possible reimposition of tariffs, could disrupt or even reverse the current disinflationary trend in the US economy. This scenario could lead to the Fed’s easing cycle shortening as a result.

US yields lost steam this week

The performance of US yields along the curve mirrored that of the US dollar, heading south in the first half of the week. The pullback preceded a weak recovery in the latter part of the week, always in response to changes in investor sentiment around the most likely rate cut by the Fed next month.

Key upcoming events

Next, all eyes are expected to be on the release of the Fed’s preferred inflation gauge, Personal Consumption Expenditure (PCE), on August 30. Despite the importance of reading on the Fed’s plan to cut rates, such a move should be well-priced by the time it rolls out. Second, the Conference Board will release the Consumer Confidence print on August 27.

Technicals on the US Dollar Index

Odds for a continuation of the selling trend in DXY have increased since the index convincingly broke below the key 200-day SMA at 104.02 today.

If sellers maintain control, the US dollar index (DXY) could first decline to the 2024 low of 100.66 (August 23), closely followed by the December 2023 low of 100.61 (December 28) and finally to test the psychological level of 100.00.

On the upside, there is immediate resistance at the weekly high of 103.54 (August 8), ahead of the key 200-day SMA and the weekly high of 104.79 (July 30). Should this area be breached, DXY could advance to the June high of 106.13 (June 26) ahead of the 2024 peak of 106.51 (April 16).

On the daily chart, the RSI remains in the oversold region around 27, opening the door for a potential upside attempt in the very near future.