US Dollar Forecast: DXY Poised to Extend Rally Despite Suggestions the Fed May be Done
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US DOLLAR FORECAST:
USD FORECAST: NEUTRAL
- Dollar Index (DXY) Stages Late Week Comeback to Finish a 7th Successive Week of Gains.
- Positive Signs for the Federal Reserve as Unemployment and Average Earnings Begin to Head in the Right Direction.
- DXY Seems to be Gaining Further Support from the Dollars Safe Haven Appeal as Recessionary Fears in Other Economies Mount.
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US JOBS REPORT SHOWS SIGNS OF DETERIORATION BUT ALLAYS RECESSION FEARS
The US Dollar is on course to extend its gains this week with marginal gains (currently up 0.07% at the time of writing). The recovery on Thursday and Friday however is particularly interesting especially on the back of what many would consider clear signs that the Federal Reserve are done on the hiking cycle. Friday’s labor data showed clear signs of a cooling labor market with unemployment ticking higher by three tenths of a percent and average earning falling slightly as well.
The whipsaw price action may be down to the fact that jobs data on Friday actually provided markets with the perfect cocktail, particularly risk assets. The data is likely to keep a Fed hike in September at bay while keeping hopes that the US economy may be able to stave of a recession. It’s also key to note that the August payroll numbers may be slightly distorted by the ongoing strike by Hollywood actors which resulted in a 17k decrease in the motion picture and sound recording industries last month. The bankruptcy of trucking firm Yellow in early August led to 37,000 job losses in the truck transportation industry as well and these are considered one of events. The distortions may be what led to some of the risk on moves we saw on Friday and was also evident in Fed Funds Futures pricing, with an increase in the probability that the US Federal Reserve will hold rates steady at 93%, up from 80% last week.
US data on the whole is showing signs of deterioration but at this stage a “soft landing remains a possibility”. This is in contrast to the Euro Area in particular where fears of a recession are rising as well as a slight uptick in inflationary pressure once more. Fed Bank of Cleveland President Loretta Mester said on Friday that the U.S. labor market remains strong despite signs of it coming into better balance, while noting future interest rate decisions will be made based on incoming data. September is definitely going be an intriguing month for Central Banks as they look to balance monetary policy and consumer expectations as the tightening cycles begin to hurt.
Source: CME FedWatch Tool
US TREASURY YIELDS
US Treasury yields had a mixed an interesting week and almost mimicked the Dollar Index (DXY) with losses early in the week before a strong rally on Friday for both US 2Y and 10Y. The 2Y did however experience more losses at the start the week than the 10Y, as some would call it ‘falling off a cliff’ after printing a fresh high on Friday. This has narrowed the gap between the 2Y and 10Y to falling to its lowest level in some time as the soft-landing theory received a positive nod.
US 2Y and US 10Y Yields
Source: TradingView, Created by Zain Vawda
THE WEEK AHEAD: ISM SERVICES DATA TO DOMINATE
Heading into next week and we have a slowdown in terms of data with a lot of mid-tier data but not a lot of in terms of high impact catalysts from the US. ISM Services data being the primary focus and could create quite a lot of volatility given that the US is largely a service driven economy.
Given the recent signs of deterioration in US data there is a high likelihood that we see a softer print. This could add to the idea that the Fed may be done on their hiking cycle and thus give risk assets a further boost. The DXY for its part seems to be benefitting as well from the idea that the US may enjoy a soft landing with other markets really feeling the strain, which seems to in part be aiding the US Dollars safe-haven appeal.
Other mid-tier data that may be of note include consumer credit data which is expected to rebound based on the recent retail sales and consumer spending data. This is likely to be short lived however, as with higher rates and consumers savings starting to run out, as well as the resumption of student loan repayments beginning soon consumer spending is likely to come under strain in the months ahead.
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TECHNICAL OUTLOOK AND FINAL THOUGHTS
Looking at the technical perspective and the Dollar Index has now seen a change in structure on a weekly chart having taken out the previous swing high around the 103.00 handle. This is massive in my opinion and has been reinforced this week thanks following an aggressive bounce of the 200-day MA and the crucial support area around the 103.00 mark.
Th e recovery at the end the week leaves the DXY with a seventh successive week of gains with the index poised to make further gains particularly if we see further deterioration around global economies next week.
US Dollar Index (DXY) Daily Chart – September 1, 2023
Key Levels to Keep an Eye On:
- 103.00 (200-day MA)
- 102.53 (100-day MA)
- 105.00 (psychological level)
- 105.63 (March swing high)
Written by: Zain Vawda, Market Writer for DailyFX.com
Contact and follow Zain on Twitter: @zvawda
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.