US dollar forecast:
USD Forecast: Neutral
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Hawkish Powell’s message raises odds of rate hike
Following a week of generally favorable US data, the US dollar expanded its gains for the sixth week in a row on the back of Fed Chair Jerome Powell’s hawkish message in Jackson Hole. DXY, meanwhile, struggled on Friday despite Powell’s hawkish messages. Many of the Fed’s remarks appeared to have been priced into prices before he even took the stage. This was reflected in risk assets, which enjoyed a bullish Friday and ended a mixed week.
Following Fed Chair Powell’s speech, there was some back-and-forth on the possibility of a rate hike. But as the fuss subsided, the odds for a September rate hike remained unchanged, while the odds for a 25bps rate hike in November rose from about 42% to 49.8%, prompting a temporary drop in the dollar on Friday. . But the gains in the dollar index mostly disappeared as the day progressed.
Source: CME FedWatch Tool
Central banks face an even tougher challenge the closer they get to their inflation target in balancing the possibility of a resurgence of inflation against the risk of over-tightening. This week’s PMI data showed that while rate hikes are having an effect, input costs are rising slightly and could lead to persistent inflationary pressures going forward. Fed Chairman Jerome Powell also hinted in a similar way that the Fed is in a position to proceed cautiously without ruling out the possibility of further interest rate hikes. Employment is seen as a bottleneck for the Fed, as labor numbers remain strong and the longer this situation lasts, the more likely inflationary pressures will rise in the future as demand will remain high. .
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US Treasury Yield
US Treasury yields have had a mixed and interesting week, with the US 10-year Treasury yield surging to levels not seen since 2007 earlier in the week. Longer-term yields benefited early in the week, but 5.1% after Powell’s speech to widen the inverted yield curve again, which surged on Friday as U.S. 2-year Treasurys surged to levels early next year. It was a high level slightly below the level of . This is partly due to expectations that interest rates will continue to rise in the short term.
US 2-Year and US 10-Year Yields
Source: TradingView, created by Zain Vawda
Next Week: NFP and PCE Data May Set September Fed Meeting
Heading into next week, there are a number of high-impact data events that are expected to have a major impact on how the Fed proceeds toward its September meeting. Jobs data remains strong and unemployment claims remain strong, but the lack of economic slowdown continues to embarrass and worry the Fed. White House economic adviser Bernstein said Friday that the labor market continues to accelerate inflation as demand remains high. This makes this week’s NFP data even more important, which could also affect the probability of the Federal Funds rate.
Core PCE data is still recommended by the Fed as a gauge of inflation, and Labor remains a bottleneck, based on comments this week from the Fed and White House economic advisers. The US economy has maintained demand levels, which is attributed to a tight labor market and consumer spending. We also get his second estimate of his GDP data from the US. It’s been a very interesting week for markets, especially the USD, and could play a big role in the Fed’s decision at its September meeting.
For all market-moving economic releases and events, DailyFX Calendar
Technical outlook and final thoughts
From a technical standpoint and the dollar index, we see a structural change on the weekly chart, breaking previous swing highs around the 103.00 handle. This is very important in my opinion because even if DXY faces selling pressure, it could be just a retracement before the next up leg.
The daily chart also crossed a key hurdle by breaking above the 200-day moving average for the first time since November 2022 and then breaking the descending channel.
The only thing to consider is that the RSI (14) has entered overbought territory, encountering resistance near the 104.30 mark, given the extension of the rally to the top. A period of retracement may begin before proceeding to the next up leg.
As we’ve seen the market’s sensitivity to recent data releases, much of the early week action could be essentially range bound ahead of PCE and NFP data. Fundamental factors have driven both volatility and market movements for much of 2023, with central banks paying even closer attention to data and expecting this volatility to increase further as the year progresses.
US Dollar Index (DXY) Daily chart – August 25, 2023
Source: TradingView
Key levels to watch:
support level
- 103.50
- 103.12 (200-day moving average)
- 102.43 (100-day moving average line)
resistance level
- 104.30
- 105.00 (Mental Level)
- 105.63 (March swing high)
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Written by: Zain Vawda, Market Writer DailyFX.com
Contact and follow Zain on Twitter: @zvawda