Powell Prompts the Dollar to Revenge

The U.S. Dollar Index (DXY) has risen by 0.5% this week to 100.97 points, while the EURUSD has declined at a similar pace, dropping below 1.11000. It appears the Greenback is beginning to recover following Federal Reserve (Fed) Chair Jerome Powell’s hawkish remarks during his speech on Monday.

Christine Lagarde, President of the European Central Bank (ECB), expressed confidence in achieving the inflation target of 2.0% soon, signalling a likely interest rate cut by the ECB in mid-October. In contrast, Powell indicated that the Fed’s Federal Open Market Committee (FOMC) is not rushing to implement another aggressive half-point interest rate cut, as was the case in September. Instead, a more moderate quarter-point cut is expected to be more appropriate.

There were earlier rumours that Powell had pushed FOMC members for a half-point cut in September due to concerns about the deteriorating U.S. labour market. This effort seemed to be politically motivated. However, two weeks after that decision, Powell no longer sees the same urgency, perhaps trying to influence future FOMC rate decisions ahead of November. Powell may be anticipating an improving macroeconomic situation in the U.S., with a series of manufacturing and services PMI reports expected this week, alongside positive forecasts for September’s ADP Nonfarm Payrolls data, suggesting a strengthening labour market before Friday’s official report.

Although this approach may not shield Powell from criticism by Donald Trump, investors are already adjusting their positions. Bets on a half-point rate cut by the Fed in November have fallen to 35.3% from 53.3% prior to Powell’s comments. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported $1.3 million in net outflows last week, indicating that large investors are exiting long positions on the Dollar with losses. Despite this, large investors still hold about a quarter of their original $39.9 million bets on a strengthening Greenback. If they had been more attuned to Powell's intentions, they might have reinforced their long positions.

From a technical perspective, the Dollar now has stronger prospects, with the EURUSD likely to test the support level at 1.10000 in the near future.