US Dollar flattens as markets turn all in about Fed rate cut

• The US Dollar struggles to find support as traders see Fed rate cuts as a given. 
• All eyes will be on the Fed’s Chair Jerome Powell at Jackson Hole to confirm the cuts. 
• The US Dollar index trades just above 101.00 and could fall to 100.00 if weak sentiment persists. 

The US Dollar (USD) trades broadly flat after it saw heavy selling at the start of the US session on Wednesday, triggering another leg lower towards a fresh 2024 low. The Nonfarm Payrolls revision highlighted 818,000 fewer jobs than previously estimated, the largest downward revision in over a decade, confirming market concerns about the US job market. Later, the release of the Fed Minutes for the July meeting confirmed that some members of the Federal Open Market Committee (FOMC) vowed for a rate cut back then, making this move almost certain in September. 

Although it looks like nothing can go wrong, big warning signs still need to be issued here. The Federal Reserve and Fed Chairman Jerome Powell have already advocated plenty of times that the risk of cutting too soon is one of their biggest fears. With the preliminary August Purchasing Managers Index (PMI) numbers, any strong figures might dampen the hope for either a big cut in September or further cuts down the line. 

Daily digest market movers: Cat’s out of the bag

• Markets are having difficulties to read the Purchasing Managers Index numbers from Europe. France saw an uptick in its Services PMIs driven by the Olympic Games taking place, while Germany saw its Services PMIs come in below expectations. The German Manufacturing component even fell further into contraction, which is bad news for Europe’s main economy. 
• At 12:30 GMT, the weekly US Jobless Claims are due:
  • Initial Jobless Claims are expected to rise to 230,000 from 227,000.
  • Continuing Claims stood at 1.864 million last week. No forecast available. 
• At 13:45 GMT, S&P Global will release the US preliminary PMIs for August:
  • The Services index is expected to remain quite stable, falling to 54 from 55 a month earlier.
  • The Manufacturing index is not expected to move, remaining  in contraction territory at 49.6.
  • The Composite index is seen declining to 53.5 from 54.3.
• At 14:00 GMT, Existing Home Sales are due to come out. Seeing the recent sharp decline in mortgage applications from the Mortgage Bankers Association data released Wednesday, a decline in Existing Home Sales for July is expected as well. Sales fell by 5.4% the previous month.
• The Kansas Fed Manufacturing Activity tracker for August will be released at 15:00 GMT. The previous print was -12.
• Asian equity markets are in the green across the board in anticipation that rate cuts from the Fed are now unavoidable. US futures are lagging, though, by trading rather flat. 
• The CME Fedwatch Tool shows a 67.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 32.5% chance for a 50 bps cut.  Another 25 bps cut (if September is a 25 bps cut) is expected in November by 39.7%, while there is a 46.9% chance that rates will be 75 bps below the current levels and a 13.4% probability of rates being 100 basis points lower. 
• The US 10-year benchmark rate trades at 3.81%, printing a fresh low for the week.

US Dollar Index Technical Analysis: It could all end in tears

The US Dollar Index (DXY) has been falling like a rock this week and will very likely be unable to avoid a weekly loss. However, traders should refrain from diving in massively in trying to jump on the “sell the dollar” train as there are some elements to keep in the back of one's mind. As it stands, markets are expecting a 75 bps rate cut by November. That is a very big cut considering that the Fed is until this date still data dependent. 

In this context, there is a big risk for a sharp upward correction in the DXY to recover some earlier losses. If US PMI numbers remain strong or even tick up further andFed Chairman Jerome Powell says that the Fed still remains data dependent and will want to watch recent data first before considering to start cutting, that would be a huge disappointment for markets. Traders seem to be expecting too many toys from Santa, while Santa might say he will want to wait with his deliveries of gifts in order to be sure that the market has been good enough.  

Looking up, the DXY faces a long road to recovery. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the DXY to 103.18 from where it is trading now, around 101.00.  A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (low from December 28) will be the next vital support in order to avoid another meltdown.  Should it break, the low of July 14, 2023, at 99.58 will be the ultimate level to look out for. 

US Dollar Index: Daily Chart