US Dollar sees some light at the start of the week, dovish Fed to limit the upside

US Dollar recovers after declining on Friday due to Powell's dovish remarks.
Markets anticipate 100 bps of easing by year-end and 200 bps total over the next 12 months.
Focus turns to PCE data later this week.

The US Dollar, measured by the US Dollar Index (DXY), regained some ground on Monday, hovering around 101.00 after it had plummeting last week. Friday’s decline was attributed to Federal Reserve (Fed) Chair Jerome Powell's dovish remarks at the Jackson Hole Symposium, hinting at a potential shift toward a looser monetary policy stance by the central bank. This, in turn, caused the 10-year US yield to dip beneath 3.8%, which weighed heavily on the USD.

Despite positive economic growth that exceeds expectations, the market's eagerness for aggressive monetary easing appears misplaced. The current situation warrants caution, as the totality of data points toward a disconnect between economic fundamentals and market pricing.

Daily digest market movers: US Dollar remains vulnerable following Powell's dovish remarks

Markets digest Powell’s dovish Jackson Hole speech with further easing expected.
Powell signaled a shift in Fed policy, stating that "the time has come for policy to adjust."
He also emphasized the importance of the labor market, noting an "unmistakable" slowdown.
100 bps of easing is predicted by year-end, with 200 bps total over the next 12 months.
Odds of a 50 bps cut in September are 30-35%, contingent on upcoming data.
Market participants await the August NFP report for further guidance on the Fed's path.
This Friday’s Personal Consumption Expenditures (PCE) figures from July will be key.

DXY technical outlook: DXY finds support, bullish momentum might build

The DXY index has found support at its lowest levels since December, indicating a temporary pause in selling pressure. The Relative Strength Index (RSI) remains deep in oversold territory, suggesting that there is potential for further upward corrective movements.

The Moving Average Convergence Divergence (MACD) is exhibiting steady red bars, aligning with the RSI and providing additional evidence of potential upward momentum as there is more room to correct. That being said, there are no clear signs of a reversal and the DXY is exposed for further downside.

Key support levels to monitor are 100.50, 100.30 and 100.00, while resistance levels to watch are 101.00, 101.50 and 101.80.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element in assessing the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels because low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given their significance as a gauge of the health of the economy and their direct relationship to inflation.

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