Market News

US Dollar News: Warsh's Hawkish Turn Revives September Hike Bets

The U.S. dollar starts the month of August with fresh fundamental support. The markets are now assigning a 57 percent probability of a September rate increase, up from 35 percent after Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole. The two-year Treasury notes are yielding around 4.33 percent, near a one-month high, which supports the dollar's interest rate differentials. Gulf tensions have also become defensive demand buyers after the U.S. strikes on Iran's Larak Island and Iran retaliated by striking Jordan.

The euro continues enjoying support from a more hawkish European Central Bank. From the ECB meeting minutes, policymakers were of the view that another rate hike was inevitable. A move from 2.25 percent to 2.50 percent was still a viable option in September, if inflation was to remain high. The euro-area has stabilized enough for policymakers to focus on inflation, giving the ECB room to act.

The pound continues to have a more dovish policy. Expectations for Bank of England rate hikes were further reduced before Jackson Hole and continue to be reduced, as inflation remains high and the British sterling is still set for monthly gains.

The foreign exchange landscape for August 31 is primarily about U.S. policy divergence. Warsh's shift to a more hawkish view has increased the likelihood of a September rate hike and strengthened the dollar's fundamental support. The euro continues to enjoy ECB tightening support, whereas the pound continues to have a more dovish BoE.

U.S. Dollar Index Technical Analysis: DXY Rebounds Into 99.58 Resistance as 99.34 Support Holds

The U.S. Dollar Index is trading around 99.52 on the 2-hour chart after extending its recovery from the 98.56 low. Price has now risen above the 38.2% Fibonacci level at 99.49 and is currently testing the 23.6% retracement at 99.58. The recovery has been technically constructive, however, DXY is still approaching a heavier resistance zone at 99.58–99.73, where recent highs are located.

The short-term structure remains supported by the rising trendline and fair-value gap at 99.24–99.34. Immediate resistance is located at 99.58, and above that at 99.73, 99.83, and 100.03. On the downside, support is located at 99.49, and below that at 99.41, 99.34, and 99.24.

Looking at the bigger picture, I believe DXY is still in the process of recovering above 99.34–99.41. A break above 99.58 would strengthen the