US Dollar sees Powell delivering early Christmas gifts with DXY selling off on rate cut confirmations

US Dollar sells off on the back of Fed Chairman Powell's comments.
Fed Chairman Powell delivers on market expectations and confirms cuts are coming and economic are where the Fed wants them to be.
The US Dollar index flirts with a fresh low for this week and could end below 101.00 for this week.

The US Dollar (USD) goes south on the back of dovish comments from Federal Reserve Chairman Jerome Powell out of the Jackson Hole Symposium. The Fed is ready to cut rates as Powell sees market conditions within the projected levels the Fed wants them to be, before starting its cutting cycle. Markets are applauding the communication with equities higher and US Dollar on the back foot.

On the economic data front, all data is out of the way now for this Friday. It will be vital to see where the US Dollar closes this Friday as several daily and weekly closes on the charts might confirm or show the path going forward for the US Dollar against its peers. One thing is sure, markets are having a sigh of relief with cuts now really being confirmed by the Fed Chairman himself.

Daily digest market movers: Christmas comes early

The Jackson Hole schedule from Jackson Hole:
- At 12:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic spoke ahead of the meeting, delivering cautious remarks that inflation is still too high.
- At 14:00 GMT, Fed Chairman Jerome Powell spook at the Jackson Hole Symposium. The Chairman delivered a dovish speech, which markets wanted to hear, without committing to any firms numbers or time line. It was enough though for markets to rally on.
- Federal Reserve Bank of Philadelphia President Patrick Harker will comment at 15:00 GMT on Bloomberg Television to guide markets.
- President and chief executive officer of the Federal Reserve Bank of Chicago Austan Goolsbee, will try to guide markets towards the closing bell with further comments and guidance at 16:30 GMT on CNBC, followed by comments around 17:45 GMT on Fox and again at 18:15 GMT on Bloomberg Television.
At 14:00 GMT, New Home Sales will come out, but expect this number to be overshadowed by the speech from Fed Chairman Powell. Previous sales were down 0.6% in June, with no forecast available for the July number.
Equities overall are not really spooked by the upcoming pivotal speech from Fed Chairman Powell and are advancing further. Asia is set to close this week on a positive note, Europe posts green numbers as well and US futures are even more optimistic.
The CME Fedwatch Tool shows a 75.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 24.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 51.1%, while there is a 41.0% chance that rates will be 75 bps below the current levels and a 7.9% probability of rates being 100 basis points lower.
The US 10-year benchmark rate trades at 3.81%, just below the high of this week of around 3.90%.

US Dollar Index Technical Analysis: More easing ahead?

The US Dollar Index (DXY) has the potential to move substantially this afternoon. Very high anticipations that Fed Chairman Powell will confirm rate cuts are underway is the minimum base case in the market expectations. Any less than that could see some substantial Dollar bids coming in, with the DXY soaring higher, while a verbal confirmation of a rate cut in September and by how much would see the DXY flirt with a break below 100.00.

For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the DXY to 103.18 from where it is trading now, around 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (low from December 28) will be the next vital support in order to avoid another meltdown. Should it break, the low of July 14, 2023, at 99.58 will be the ultimate level to look out for.

US Dollar Index: Daily Chart

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Share: Feed news

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. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.