US Dollar licks its wounds after one of worst weeks in over a year

• The US Dollar steadies on Monday after a steep 1.76% sell-off last week, the worst in more than a year.
• Fed Chairman Jerome Powell committed to a September interest-rate cut in its Jackson Hole speech. 
• The US Dollar index trades above 100.00 with US data underway this week.

The US Dollar (USD) is trading broadly flat on Monday after printing one of its worst weekly performances since June 2023. The US Dollar Index – which weighs the value of the US Dollar against a bucket of other currencies – shed 1.75% last week, with the latter part of those losses driven by US Federal Reserve (Fed) Chairman Jerome Powell’s words in Jackson Hole. Now that Powell has committed to a rate cut in September, markets could start to speculate over what this means for the Fed’s meeting in November and further down the line.  

Concerns could already start to pick up on Monday as the economic calendar features the often market-moving Durable Goods Orders numbers. Should overall US data remain resilient or even pick up pace, what would it mean for the Fed’s commitment to cut in September? Strong data could bring the scenario of a one-and-done rate cut, which would be taken by markets as a very cold shower. 

Daily digest market movers: Left in the dark

• Tensions grew over the weekend between Israel and Hezbollah with several attacks from both sides. 
• The United Kingdom is on a bank holiday this Monday, which means reduced flows during the European trading session. 
• In the US economic calendar, the Durable Goods Orders data for July are due to come out at 12:30 GMT:
  • Headline Durable Goods Orders are expected to rebound to a 4% increase from the 6.7% plunge seen a month earlier
  • Durable Goods without Transportation are expected to be unchanged following the prior month’s 0.4% increase..
  • Revisions to the previous month’s data could be more market-moving than the actual number. 
• Equities trade on the backfoot this Monday as traders engage in profit taking after the steep surge from Friday, which was caused by the dovish message from Fed Chairman Powell. 
• The CME Fedwatch Tool shows a 61.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 38.5% chance for a 50 bps cut.  Another 25 bps cut (if September is a 25 bps cut) is expected in November by 36.3%, while there is a 47.9% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 15.8% probability of rates being 100 (25 bps + 75 bps) basis points lower. 
• The US 10-year benchmark rate trades at 3.78%, a fresh three-week low. 

US Dollar Index Technical Analysis: The beginning of the end

The US Dollar Index (DXY) saw a substantial move lower last week, snapping several important support levels, as  markets are pricing in aggressive rate cuts by November. Expectations could be going too far, as the Fed appears unlikely to start cutting by 50 bps or more in the current scenario of a soft landing for the US economy.

For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18 from the current 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 (the low from December 28) tries to hold support, although it looks rather feeble.  Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

US Dollar Index: Daily Chart