Strong support appears around 100.50

• The US Dollar Index (DXY) returned to 13-month lows.
• Fed officials have aligned themselves with the idea of ​​a September interest rate cut.
• Markets’ attention should turn to data and NFP.

The US dollar (USD) finally saw some light at the end of the tunnel this week, managing to bounce back from levels last seen in mid-July 2023 near 100.50 to the area well beyond the 101 barrier. 00 just before the closing bell on Wall Street on Friday.

Despite the rebound seen in the latter part of the week, persistent downward pressure on the greenback stemmed in large part from growing expectations that the Federal Reserve (Fed) may begin reducing its Fed Funds Target Range (FFTR) in September. The likely size of such a move, however, still remains uncertain and depends almost exclusively on future data releases.

In addition, Friday’s negative surprise in July’s US personal consumption expenditure (PCE) price index reinforced the view that US inflation appears to be moving in a consistent direction towards the Fed’s 2% target.

A September interest rate cut appears certain amid caution over the economic outlook

Investors continued to price in the likelihood of the Fed starting its easing cycle as soon as next month, a view that was also supported by some Fed policymakers, though not without caution. This comes in direct response to nascent concerns about the health of the US economy and thus the chances of a soft landing scenario.

So far, market participants seem to be leaning towards a 25 bps interest rate cut based on firm results from US fundamentals seen in the past few days. While a 50 bps rate cut is not entirely out of the question, its occurrence requires a further deterioration in the economic outlook, which seems quite unlikely at the moment.

Expectations for a Fed rate cut next month continued to rise this week, particularly after Chairman Jerome Powell’s speech at the Jackson Hole Symposium on August 23. Moreover, this sentiment is apparently shared by some Fed officials.

It’s worth remembering that Powell has openly supported the idea of ​​cutting interest rates, expressing concern about a further cooling of the labor market and expressing optimism that inflation is approaching the bank’s 2% target.

Earlier this week, Richmond Federal Reserve President Thomas Barkin warned that the current “low-hiring, low-firing” approach used by US businesses may not last and that labor market concerns have risen at the Fed. His colleague at the Federal Reserve Bank of San Francisco, President Mary Daly, argued that “the time has come” to lower borrowing costs. However, the size of the first rate cut would depend on the data. Finally, Atlanta Federal Reserve Bank President Raphael Bostic suggested that with inflation still falling and the unemployment rate rising more than expected, now might be the right time to consider rate cuts, but he would it needed confirmation from the next monthly jobs report and two inflations. reports ahead of the September 17-18 Fed meeting.

According to the CME Group’s FedWatch tool, there’s a nearly 70 percent chance the interest rate will be cut by a quarter point in September, while a 50 bps cut has about a 30 percent chance.

Looking beyond the highly anticipated September rate cut, market participants are likely to shift their focus to assessing US economic performance. While previous recession fears appear to have subsided, future economic indicators could continue to influence monetary policy decisions, particularly regarding the extent of the expected rate cut.

Outlook on Overseas Monetary Policy: What to Expect?

The Eurozone, Japan, Switzerland and the United Kingdom are facing increasing pressure on inflation. The European Central Bank (ECB) responded by implementing a 25bp rate cut in June and maintained a cautious approach in July. While ECB policymakers remain uncertain about future rate cuts after the summer, investors are already anticipating two more cuts later this year. The Swiss National Bank (SNB) made an unexpected 25bps rate cut in June, and the Bank of England (BoE) followed suit with a quarter-point cut on 1 August. Taking a different tack, the Reserve Bank of Australia (RBA) kept rates steady at its August 6 meeting, taking a more dovish stance. Market expectations suggest the RBA could start cutting rates sometime in Q4 2024. Instead, the Bank of Japan (BoJ) surprised markets on July 31 with a dodgy message, raising rates by 15 bps to 0.25%.

Shifting perspective to politics

Since Kamala Harris became the Democratic Party’s presidential nominee for the November 5 US election, polls now show a mixed outlook on the potential outcome. However, it is critical to consider that another Trump administration, along with the potential reimposition of tariffs, could disrupt or even reverse the current disinflationary trend in the US economy, potentially leading to a shorter cycle of rate cuts. to the Fed.

US yields maintained a patchy performance

US Treasury yields turned mostly lower on the short end of the curve against a gradual and persistent rise on the belly and long side. This choppy behavior largely reflected changing investor sentiment about the Fed’s anticipated rate cut next month.

Key upcoming events

A look at next week’s economic calendar highlights the release of the ever-relevant Non-Farm Payrolls at the end of the week. Previously, the labor market report is expected to take center stage with the release of the ADP report and, usually weekly, initial jobless claims. In addition, the latest S&P Global PMIs will be held, along with key manufacturing and service sector instruments tracked by the ISM.

Technicals on the US Dollar Index

The likelihood of continued downward pressure on the US Dollar Index (DXY) increased after it decisively fell below its 200-day simple moving average (SMA), currently at 103.95.

If the bearish trend persists, DXY could initially target the 2024 low of 100.51 (reached on August 27), followed by the psychologically significant level of 100.00.

On the upside, immediate resistance comes at the August 8 weekly high of 103.54, followed by the key 200-day SMA and the July 30 weekly high of 104.79. If this area is breached, DXY could rally towards the June 26 high of 106.13 before challenging the 2024 high of 106.51 set on April 16.

The relative strength index (RSI) of the daily chart has bounced back around the 40 region after falling into the oversold zone in the previous days.