The U.S. Dollar Index (DXY) is seeing a modest
rise of 0.1% this week, reaching 100.80 points, while the EURUSD pair has
declined by 0.15% to 1.11700. The Dollar is showing mixed performance against
other reserve currencies, but it has maintained its strength following a
significant 1.6% surge on Friday. This uptick came after Federal Reserve
Chairman Jerome Powell signaled the onset of an interest rate cut cycle by
declaring, "the time has come."
Powell’s remarks marked a notable shift in the
Fed's priorities, as he emphasized that inflation, now moving steadily toward
the 2.0% target, is no longer the central concern. Instead, the focus has
shifted to the labor market, which seems to have become a primary issue for
policymakers. This pivot is surprising, given that Powell was previously
cautious about reducing interest rates. The abrupt change in stance may be
attributed to the substantial downward revision of Nonfarm Payrolls figures,
which were adjusted down by 818,000 to 2.082 million for the period between
April 2023 and March 2024—the most significant revision since the 2009
financial crisis.
The drop in Manufacturing PMI to 48.0 points
in August, the lowest level of the year, combined with rising unemployment, may
be painting a recessionary picture for the Fed. Powell’s dovish tone at the
Jackson Hole symposium last Friday could be an indication that the Fed is
concerned about being too late to address the economic slowdown, particularly
as the labor market appears to have shifted into contraction.
The American debt market has responded with
relative calm, as the benchmark 10-year Treasury yields initially dropped to
3.79% from 3.93% following Powell's speech, before edging back up to 3.84%
later in the week. Despite the modest gains in the Dollar, there is potential
for further upside. This view is supported by significant inflows into the
WisdomTree Bloomberg US Dollar Bullish Fund (USDU), which recorded $39.9
million in net inflows last week, all occurring after Powell’s address. This
marks the largest inflow since early May, a period during which the Dollar
appreciated 2.0% against the Euro in one month.
Given the current market sentiment, overbought
conditions for the EURUSD pair are intensifying. Large investors are
anticipating a further decline of 1.0-2.0%, potentially pushing the pair down
to 1.10000-1.11000. Should the pair drop below 1.10000, a more pronounced
downward reversal in the currency market could unfold.
Looking ahead, there are no major events
expected to shake the currency market this week. The second estimate of Q2 U.S.
GDP is anticipated to be neutral, at 2.8% QoQ, while Initial Jobless Claims are
expected to rise. The July PCE index is forecasted to deliver mixed results.
However, given Powell’s recent comments downplaying inflation concerns, these
data points may have little impact on the market.
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