Market News

US Dollar News: Warsh and PCE Take Center Stage as Euro Holds Firm

With Fed Chair Kevin Warsh's first Jackson Hole speech and the release of the PCE inflation report later this week, the U.S. dollar commences trading on August 25. Stronger U.S. sanctions against Iran provided the dollar with minor support as foreign companies, making a deal with Iran, could lose access to the U.S. financial system, thus increasing the demand for the dollar. Conversely an aggressive plan of the Treasury to buy back long-maturity bonds to control long-term borrowing costs has increased concern about the fiscal credibility of the U.S. dollar. The 10-year Treasury yields around 4.7% and investors are still struggling to reconcile how concerns around stress in bonds could limit further rate hikes by the Fed.

The euro has a firm monetary policy setting. The composite PMI in the Eurozone grew to 52.1 in August, the highest level since November. The manufacturing PMI also hit a 54-month high and orders, both new and incoming, grew at the fastest pace in more than three years. Unemployment also hit a positive level for the year. Most investors still expect the ECB to raise the deposit rate from 2.25%, however, slowing inflation may keep rate hikes less aggressive this cycle.

Since at least one more Bank of England increase is expected this year, Sterling is expected to remain firm, UK inflation reaching 2.9% in July. While the case for more aggressive tightening may be limited by softer data in the labor market and spending in retail, recent strength in the pound reflects dollar weakness.

For August 25, the dominant theme in currency markets is expected to be policy uncertainty in Washington compared with more clearly defined rate expectations in Europe and Britain. After Jackson Hole, the next major influence on currency markets will be the release of the PCE inflation data.

U.S. Dollar Index Technical Analysis: DXY Rebounds From $98.55 but Remains Below Key Trend Resistance

Currently, the U.S. Dollar Index is at $99.02, up slightly from $98.55 on the 2-hour chart. While the rebound gives some short-term momentum to the DXY, it still sits below both the 100-EMA at $99.22 and the 50-EMA at $99.02, with an overall downtrend remaining intact. Until this changes, the structure will continue to be bearish.

RSI also shows the short term rebound and is currently at 55, which shows a recovery from oversold conditions and a move back above the neutral 50 level. There is resistance at $99.13 and $99.27, and even further at $99.38 and $99.71. If buying pressure pushes the price above these, $100.03 and $100.42 will be the next targets. In the event downward pressure remains at $98.99, $98.82, and $98.55, there is still downside.