Dollar Sell-Off Pauses for Now

Following the heavy sell off we saw over July and August; the US Dollar is seeing some recovery action through the first week of Q3. DXY has bounced off the 100.92 level support and is currently around 1.2% higher. The move comes despite an uptick in Fed easing expectations on the back of Powell’s recent comments confirming that the Fed will ease in September. Powell told the Jackson Hole audience that the time to adjust monetary policy had now arrived and signalled that the Fed had plenty of scope to adjust policy levels as needed given current interest rates.

Fed Easing Expectations

The issue for USD bears now is that on the back of the heavy sell off through summer, the market now has a higher barrier for moving lower. Looking ahead, expectations are split over whether the Fed will cut by a larger .5% amount in September, or kick things off with a .25% cut. If the latter is seen, USD might struggle to move lower again unless the guidance is firmly dovish. However, if we see the Fed cutting by a larger amount, along with firmly dovish guidance, this should give bears enough ammunition to push lower. Traders will now be watching incoming jobs and inflation data ahead of the September meeting. If Friday’s labour market readings show fresh weakness, this should bolster expectations of a deeper cut, sending USD lower again near-term.

Technical Views

DXY

The sell off in the index has stalled for now into a test of the 100.93 level support. Price has bounced through, remains below the broken bull trend line and the 102.46 level. This is a key resistance area for the market and while price holds beneath, focus is on a further push lower. Back above there, focus shifts to 104.05.