US Dollar Weekly Forecast: The king is alive
Premium|Take advantage of 50% OFF on your first month.
Start your subscription and get access to all our original articles.
You have reached your limit of 5 free articles for this month.
Get all exclusive analysis, access our analysis and get Gold and signals alerts
Elevate your trading Journey.
UPGRADE- The US Dollar Index (DXY) bounced off 13-month lows.
- Fed officials aligned behind the idea of a September interest-rate cut.
- Markets’ attention should rotate towards data and NFP.
The US Dollar (USD) finally saw a bit of light at the end of the tunnel this week, managing to rebound from levels last recorded in mid-July 2023 near 100.50 to the area well beyond the 101.00 barrier just ahead of the closing bell on Wall Street on Friday.
Despite the rebound seen in the latter part of the week, persistent downward pressure on the Greenback mostly stemmed from growing expectations that the Federal Reserve (Fed) might begin reducing its Fed Funds Target Range (FFTR) in September. The likely size of such a move, however, still remains uncertain and hinges almost exclusively on upcoming data releases.
Furthermore, Friday’s negative surprise from the US Personal Consumption Expenditures (PCE) Price Index in July reinforced the view that US inflation appears to be heading in a consistent direction towards the Fed’s 2% target.
A September rate cut appears certain amidst caution on the economic outlook
Investors continued to price in the likelihood that the Fed might start its easing cycle as soon as next month, a view that has also been bolstered by some Fed policymakers, albeit not without prudence. This comes in direct response to incipient concerns over the health of the US economy and, therefore, the chances of a soft landing scenario.
So far, market participants seem to lean towards a 25 bps interest rate reduction on the back of firm results from US fundamentals seen in past days. While a 50 bps rate cut is not entirely ruled out, its occurrence necessitates a further deterioration in the economic outlook, which looks pretty unlikely for the time being.
Expectations for a Fed interest rate cut next month have continued to grow this week, particularly after Chair Jerome Powell’s speech at the Jackson Hole Symposium on August 23. Furthermore, this sentiment is seemingly shared by some Fed officials.
It is worth remembering that Powell openly endorsed the idea of interest rate cuts, expressing concern about further job market cooling and conveying optimism that inflation was approaching the bank's 2% target.
Earlier this week, Richmond Federal Reserve President Thomas Barkin warned that the current "low-hiring, low-firing" approach used by US businesses might not last, and that job market concerns have grown at the Fed. His colleague at the San Francisco Federal Reserve Bank, President Mary Daly, argued that "the time is upon us" to cut borrowing costs. However, the size of the first rate cut would depend on the data. Finally, Federal Reserve Bank of Atlanta President Raphael Bostic suggested that with inflation declining further and the unemployment rate rising more than expected, it might be the right time to consider rate cuts, but he would need confirmation from the upcoming monthly jobs report and two inflation reports before the Fed's meeting on September 17-18.
According to the CME Group's FedWatch Tool, there's almost 70% probability of a quarter-point rate cut in September, while a 50 bps reduction has around 30% chance.
Looking beyond the highly anticipated September rate cut, market participants are likely to shift their focus to evaluating the US economic performance. While earlier recession fears seem to have subsided, upcoming economic indicators could still influence monetary policy decisions, especially concerning the magnitude of the expected rate reduction.
Outlook on overseas monetary policy: What to expect?
The Eurozone, Japan, Switzerland, and the United Kingdom are all experiencing increasing downward pressure on inflation. The European Central Bank (ECB) responded by implementing a 25 bps rate cut in June and maintained a cautious approach in July. While ECB policymakers remain uncertain about further rate reductions after summer, investors are already anticipating two more cuts later this year. The Swiss National Bank (SNB) made an unexpected 25 bps rate cut in June, and the Bank of England (BoE) followed suit with a quarter-point reduction on August 1. Taking a different approach, the Reserve Bank of Australia (RBA) held rates steady at its August 6 meeting, adopting a more hawkish stance. Market expectations suggest the RBA may begin easing rates at some point in Q4 2024. In contrast, the Bank of Japan (BoJ) surprised markets on July 31 with a hawkish message, raising rates by 15 bps to 0.25%.
Shifting the view to politics
Since Kamala Harris became the Democratic Party's presidential candidate for the US elections on November 5, polls are now showing a mixed outlook on the potential outcome. However, it is crucial to consider that another Trump administration, along with the potential reintroduction of tariffs, could disrupt or even reverse the current disinflationary trend in the US economy, potentially leading to a shorter cycle of rate cuts by the Fed.
US yields kept an erratic performance
US Treasury yields headed mostly lower on the short end of the curve against a gradual and persistent increase on the belly and the long end. This choppy behaviour largely reflected shifting investor sentiment regarding the Fed’s anticipated interest rate cut in the coming month.
Upcoming key events
A glimpse at next week’s economic calendar highlights the publication of the always-relevant Nonfarm Payrolls at the end of the week. Earlier, the labour market report is expected to remain at centre stage with the releases of the ADP report, and usual weekly Initial Jobless Claims. In addition, the final S&P Global PMIs are due, along with the key gauges of the manufacturing and services sectors tracked by the ISM.
Techs on the US Dollar Index
The likelihood of continued downward pressure on the US Dollar Index (DXY) has increased after it decisively broke below the crucial 200-day Simple Moving Average (SMA), currently at 103.95.
If the bearish trend persists, the DXY might initially target the 2024 low of 100.51 (reached on August 27), followed by the psychologically significant 100.00 level.
On the upside, immediate resistance appears at the August 8 weekly high of 103.54, followed by the key 200-day SMA and the July 30 weekly peak of 104.79. If this zone is trespassed, the DXY could potentially climb towards the June 26 top of 106.13 before challenging the 2024 peak of 106.51 set on April 16.
The daily chart's Relative Strength Index (RSI) rebounded to around the 40 region, after dropping to the oversold zone in previous days.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
- The US Dollar Index (DXY) bounced off 13-month lows.
- Fed officials aligned behind the idea of a September interest-rate cut.
- Markets’ attention should rotate towards data and NFP.
The US Dollar (USD) finally saw a bit of light at the end of the tunnel this week, managing to rebound from levels last recorded in mid-July 2023 near 100.50 to the area well beyond the 101.00 barrier just ahead of the closing bell on Wall Street on Friday.
Despite the rebound seen in the latter part of the week, persistent downward pressure on the Greenback mostly stemmed from growing expectations that the Federal Reserve (Fed) might begin reducing its Fed Funds Target Range (FFTR) in September. The likely size of such a move, however, still remains uncertain and hinges almost exclusively on upcoming data releases.
Furthermore, Friday’s negative surprise from the US Personal Consumption Expenditures (PCE) Price Index in July reinforced the view that US inflation appears to be heading in a consistent direction towards the Fed’s 2% target.
A September rate cut appears certain amidst caution on the economic outlook
Investors continued to price in the likelihood that the Fed might start its easing cycle as soon as next month, a view that has also been bolstered by some Fed policymakers, albeit not without prudence. This comes in direct response to incipient concerns over the health of the US economy and, therefore, the chances of a soft landing scenario.
So far, market participants seem to lean towards a 25 bps interest rate reduction on the back of firm results from US fundamentals seen in past days. While a 50 bps rate cut is not entirely ruled out, its occurrence necessitates a further deterioration in the economic outlook, which looks pretty unlikely for the time being.
Expectations for a Fed interest rate cut next month have continued to grow this week, particularly after Chair Jerome Powell’s speech at the Jackson Hole Symposium on August 23. Furthermore, this sentiment is seemingly shared by some Fed officials.
It is worth remembering that Powell openly endorsed the idea of interest rate cuts, expressing concern about further job market cooling and conveying optimism that inflation was approaching the bank's 2% target.
Earlier this week, Richmond Federal Reserve President Thomas Barkin warned that the current "low-hiring, low-firing" approach used by US businesses might not last, and that job market concerns have grown at the Fed. His colleague at the San Francisco Federal Reserve Bank, President Mary Daly, argued that "the time is upon us" to cut borrowing costs. However, the size of the first rate cut would depend on the data. Finally, Federal Reserve Bank of Atlanta President Raphael Bostic suggested that with inflation declining further and the unemployment rate rising more than expected, it might be the right time to consider rate cuts, but he would need confirmation from the upcoming monthly jobs report and two inflation reports before the Fed's meeting on September 17-18.
According to the CME Group's FedWatch Tool, there's almost 70% probability of a quarter-point rate cut in September, while a 50 bps reduction has around 30% chance.
Looking beyond the highly anticipated September rate cut, market participants are likely to shift their focus to evaluating the US economic performance. While earlier recession fears seem to have subsided, upcoming economic indicators could still influence monetary policy decisions, especially concerning the magnitude of the expected rate reduction.
Outlook on overseas monetary policy: What to expect?
The Eurozone, Japan, Switzerland, and the United Kingdom are all experiencing increasing downward pressure on inflation. The European Central Bank (ECB) responded by implementing a 25 bps rate cut in June and maintained a cautious approach in July. While ECB policymakers remain uncertain about further rate reductions after summer, investors are already anticipating two more cuts later this year. The Swiss National Bank (SNB) made an unexpected 25 bps rate cut in June, and the Bank of England (BoE) followed suit with a quarter-point reduction on August 1. Taking a different approach, the Reserve Bank of Australia (RBA) held rates steady at its August 6 meeting, adopting a more hawkish stance. Market expectations suggest the RBA may begin easing rates at some point in Q4 2024. In contrast, the Bank of Japan (BoJ) surprised markets on July 31 with a hawkish message, raising rates by 15 bps to 0.25%.
Shifting the view to politics
Since Kamala Harris became the Democratic Party's presidential candidate for the US elections on November 5, polls are now showing a mixed outlook on the potential outcome. However, it is crucial to consider that another Trump administration, along with the potential reintroduction of tariffs, could disrupt or even reverse the current disinflationary trend in the US economy, potentially leading to a shorter cycle of rate cuts by the Fed.
US yields kept an erratic performance
US Treasury yields headed mostly lower on the short end of the curve against a gradual and persistent increase on the belly and the long end. This choppy behaviour largely reflected shifting investor sentiment regarding the Fed’s anticipated interest rate cut in the coming month.
Upcoming key events
A glimpse at next week’s economic calendar highlights the publication of the always-relevant Nonfarm Payrolls at the end of the week. Earlier, the labour market report is expected to remain at centre stage with the releases of the ADP report, and usual weekly Initial Jobless Claims. In addition, the final S&P Global PMIs are due, along with the key gauges of the manufacturing and services sectors tracked by the ISM.
Techs on the US Dollar Index
The likelihood of continued downward pressure on the US Dollar Index (DXY) has increased after it decisively broke below the crucial 200-day Simple Moving Average (SMA), currently at 103.95.
If the bearish trend persists, the DXY might initially target the 2024 low of 100.51 (reached on August 27), followed by the psychologically significant 100.00 level.
On the upside, immediate resistance appears at the August 8 weekly high of 103.54, followed by the key 200-day SMA and the July 30 weekly peak of 104.79. If this zone is trespassed, the DXY could potentially climb towards the June 26 top of 106.13 before challenging the 2024 peak of 106.51 set on April 16.
The daily chart's Relative Strength Index (RSI) rebounded to around the 40 region, after dropping to the oversold zone in previous days.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.