US Dollar Weekly Forecast: Attention shifts to Powell and Payrolls
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UNLOCK OFFER- US Dollar Index (DXY) extended its uptrend further.
- Market participants still see the Fed’s first rate cut in September.
- NFP and Powell should dictate the price action next week.
A visit to the 2024 top looms closer
Another positive week finally saw the Greenback surpass the key 106.00 barrier for the first time since early May, according to the US Dollar Index (DXY). Indeed, the Index advanced for the fourth week in a row, once again on the back of the growing divergence in monetary policy between the Federal Reserve (Fed) and most other G10 central banks.
Monetary policy divergence and inflation
A closer look at the recent performance of the US Dollar (USD) reveals that it has managed to regain further strength against the broad risk-associated space since the FOMC June 12 meeting, in which the Fed largely met investors’ expectations by keeping the Fed Funds Target Range (FFTR) unchanged at 5.25%–5.50%, and the drop in US inflation reflected by the Consumer Price Index (CPI).
Among the G10 central banks, the European Central Bank (ECB) reduced its rates by 25 bps early in June. The Swiss National Bank (SNB) surprised markets with an additional 25 bps cut on June 20, while the Bank of England (BoE) issued a dovish hold on the same day. Similarly, the Bank of Japan (BoJ) conveyed a dovish message on June 14.
In contrast, the Reserve Bank of Australia (RBA) is expected to start easing in the first half of next year, while the Fed might begin reducing its rates by the end of this year, according to their latest meeting. It is worth recalling that the Federal Open Market Committee (FOMC) also indicated only one interest rate cut this year, likely at the December 18 event.
However, the reemergence of disinflationary pressure, as per the CPI and Friday’s Personal Consumption Expenditures (PCE) report, along with a slowdown in key areas such as the US labour market in recent weeks, seem to have prompted market participants to start pencilling in two interest rate cuts by the central bank this year, likely in September and December.
One or two interest rate cuts?
A large driver behind the strong performance of the Greenback as of late must be found in the resilient, hawkish tone of the majority of Fed officials. All in all, while policymakers acknowledged the importance of inflation coming down, they still showed a persistent lack of confidence that this downward trend is sustainable.
These past few days, the President of the Federal Reserve Bank of Chicago, Austan Goolsbee, and Mary Daly, President of the San Francisco Federal Reserve Bank, have expressed confidence that inflationary pressure is easing, with Daly not believing the bank should cut rates until they are confident that inflation is moving towards 2%.
In addition, Fed Governor Lisa Cook has indicated that the bank is on track for a rate cut if the economy's performance aligns with her expectations. Her colleague Michelle Bowman believes that inflation will decline further with the policy rate held steady, and rate cuts will be appropriate if inflation moves sustainably towards 2%. Finally, Atlanta Fed President Raphael Bostic believes inflation is narrowing, allowing the Fed to cut interest rates later this year.
Nevertheless, according to the FedWatch Tool by CME Group, there is approximately a 68% chance of lower rates at the September 18 meeting and nearly a 95% likelihood by the end of the year.
US yields do not validate US Dollar’s advance yet
The continuation of the intense upward momentum in the Greenback following the FOMC hiccup has not been reflected in US yields so far. In fact, yields have maintained their consolidative mood unchanged since the beginning of June at the lower end of the range.
Fed's hawkish tone and inflation trends challenge market expectations of rate cuts
To sum up, persistent hawkish Fedspeak favouring extra patience and further evidence of inflation’s path toward the Fed’s target maintains its collision course with the market’s belief of two interest rate cuts in the latter part of the year.
The still unabated constructive bias in the Dollar appears to favour the Fed’s option, hence, the likelihood of an extra advance in the currency remains well on the table on the medium-term horizon.
Moving forward, Chief Powell’s participation in the ECB Forum at Sintra (Portugal) is expected to yield the same tone of recent comments, while the publication of the US labour market in the latter part of next week should prove to be more crucial in shedding further details on the Fed’s plans to start reducing its interest rates.
Upcoming key events
A busy and interesting week lies ahead for the Dollar on the data front. Powell will speak at the ECB Forum early in the week, followed by the ADP report and results from key Manufacturing and Services PMIs by the ISM. In addition, the FOMC will publish its Minutes of the June meeting and June’s Nonfarm Payrolls emerge as the salient event towards the end of the week.
Techs on the US Dollar Index
The DXY maintained its firm momentum after bottoming out near 104.00 in early June, managing to finally trespass the key 106.00 hurdle.
If the index breaks above the June top of 106.13 (June 26), it might confront the 2024 high of 106.51 (April 16). Once it clears this region, DXY might embark on a probable visit to the November peak of 107.11 (November 1) ahead of the 2023 top of 107.34 (October 3).
On the other hand, the key 200-day SMA of 104.49 should offer decent initial contention before the June low of 103.99 (June 4). A deeper pullback could put the weekly low of 103.88 (April 9) back on the radar ahead of the March low of 102.35 (March 8) and the December bottom of 100.61 (December 28), all before the psychological contention zone at 100.00.
Meanwhile, the Dollar’s bullish outlook should remain intact while above the key 200-day SMA.
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
Read more.Last release: Fri Jun 07, 2024 12:30
Frequency: Monthly
Actual: 272K
Consensus: 185K
Previous: 175K
Source: US Bureau of Labor Statistics
America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.
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.
- US Dollar Index (DXY) extended its uptrend further.
- Market participants still see the Fed’s first rate cut in September.
- NFP and Powell should dictate the price action next week.
A visit to the 2024 top looms closer
Another positive week finally saw the Greenback surpass the key 106.00 barrier for the first time since early May, according to the US Dollar Index (DXY). Indeed, the Index advanced for the fourth week in a row, once again on the back of the growing divergence in monetary policy between the Federal Reserve (Fed) and most other G10 central banks.
Monetary policy divergence and inflation
A closer look at the recent performance of the US Dollar (USD) reveals that it has managed to regain further strength against the broad risk-associated space since the FOMC June 12 meeting, in which the Fed largely met investors’ expectations by keeping the Fed Funds Target Range (FFTR) unchanged at 5.25%–5.50%, and the drop in US inflation reflected by the Consumer Price Index (CPI).
Among the G10 central banks, the European Central Bank (ECB) reduced its rates by 25 bps early in June. The Swiss National Bank (SNB) surprised markets with an additional 25 bps cut on June 20, while the Bank of England (BoE) issued a dovish hold on the same day. Similarly, the Bank of Japan (BoJ) conveyed a dovish message on June 14.
In contrast, the Reserve Bank of Australia (RBA) is expected to start easing in the first half of next year, while the Fed might begin reducing its rates by the end of this year, according to their latest meeting. It is worth recalling that the Federal Open Market Committee (FOMC) also indicated only one interest rate cut this year, likely at the December 18 event.
However, the reemergence of disinflationary pressure, as per the CPI and Friday’s Personal Consumption Expenditures (PCE) report, along with a slowdown in key areas such as the US labour market in recent weeks, seem to have prompted market participants to start pencilling in two interest rate cuts by the central bank this year, likely in September and December.
One or two interest rate cuts?
A large driver behind the strong performance of the Greenback as of late must be found in the resilient, hawkish tone of the majority of Fed officials. All in all, while policymakers acknowledged the importance of inflation coming down, they still showed a persistent lack of confidence that this downward trend is sustainable.
These past few days, the President of the Federal Reserve Bank of Chicago, Austan Goolsbee, and Mary Daly, President of the San Francisco Federal Reserve Bank, have expressed confidence that inflationary pressure is easing, with Daly not believing the bank should cut rates until they are confident that inflation is moving towards 2%.
In addition, Fed Governor Lisa Cook has indicated that the bank is on track for a rate cut if the economy's performance aligns with her expectations. Her colleague Michelle Bowman believes that inflation will decline further with the policy rate held steady, and rate cuts will be appropriate if inflation moves sustainably towards 2%. Finally, Atlanta Fed President Raphael Bostic believes inflation is narrowing, allowing the Fed to cut interest rates later this year.
Nevertheless, according to the FedWatch Tool by CME Group, there is approximately a 68% chance of lower rates at the September 18 meeting and nearly a 95% likelihood by the end of the year.
US yields do not validate US Dollar’s advance yet
The continuation of the intense upward momentum in the Greenback following the FOMC hiccup has not been reflected in US yields so far. In fact, yields have maintained their consolidative mood unchanged since the beginning of June at the lower end of the range.
Fed's hawkish tone and inflation trends challenge market expectations of rate cuts
To sum up, persistent hawkish Fedspeak favouring extra patience and further evidence of inflation’s path toward the Fed’s target maintains its collision course with the market’s belief of two interest rate cuts in the latter part of the year.
The still unabated constructive bias in the Dollar appears to favour the Fed’s option, hence, the likelihood of an extra advance in the currency remains well on the table on the medium-term horizon.
Moving forward, Chief Powell’s participation in the ECB Forum at Sintra (Portugal) is expected to yield the same tone of recent comments, while the publication of the US labour market in the latter part of next week should prove to be more crucial in shedding further details on the Fed’s plans to start reducing its interest rates.
Upcoming key events
A busy and interesting week lies ahead for the Dollar on the data front. Powell will speak at the ECB Forum early in the week, followed by the ADP report and results from key Manufacturing and Services PMIs by the ISM. In addition, the FOMC will publish its Minutes of the June meeting and June’s Nonfarm Payrolls emerge as the salient event towards the end of the week.
Techs on the US Dollar Index
The DXY maintained its firm momentum after bottoming out near 104.00 in early June, managing to finally trespass the key 106.00 hurdle.
If the index breaks above the June top of 106.13 (June 26), it might confront the 2024 high of 106.51 (April 16). Once it clears this region, DXY might embark on a probable visit to the November peak of 107.11 (November 1) ahead of the 2023 top of 107.34 (October 3).
On the other hand, the key 200-day SMA of 104.49 should offer decent initial contention before the June low of 103.99 (June 4). A deeper pullback could put the weekly low of 103.88 (April 9) back on the radar ahead of the March low of 102.35 (March 8) and the December bottom of 100.61 (December 28), all before the psychological contention zone at 100.00.
Meanwhile, the Dollar’s bullish outlook should remain intact while above the key 200-day SMA.
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
Read more.Last release: Fri Jun 07, 2024 12:30
Frequency: Monthly
Actual: 272K
Consensus: 185K
Previous: 175K
Source: US Bureau of Labor Statistics
America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.
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.
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