Investors have been focusing on recent US economic statistics, Federal Reserve actions and global central bank decisions in recent days. On Thursday it was at $104,17, down from its July high of 106.2.
Federal Reserve interest rate decision
After the Federal Open Market Committee’s (FOMC’s) July decision, DXY fell. The bank made a decision to keep interest rates between 5.25% and 5.50%, as they had been for the past few months.
Analysts had expected the Fed to make a rate announcement that was similar to what it has done in recent months.
The Fed has confirmed, however, that they are beginning to consider cutting rates of interest as their focus continues on dual purposes.
Two main functions of the Fed are to ensure that unemployment and inflation rates remain stable. The Fed’s inflation target is 2%.
Recent numbers show that the US inflation rate is still high. The figure is still down, but it has been for the past three months. Analysts believe the trend will continue.
Fed also indicated that they will start reducing interest rates before the inflation rate reaches its target of 2.0%.
US nonfarm payrolls data ahead
The Fed instead hinted at a greater focus on the weakening labor market.
A report released by the Bureau of Labor Statistics on Tuesday showed that there was a softening of the labor market as the number of job vacancies dropped to the lowest level since 2021.
ADP’s latest report reveals that private employers created only 122,000 new jobs in July, the lowest level since 2023.
Now, the focus is on Friday’s Nonfarm Payrolls (NFP). Reuters polled economists who expect that July’s data will show that 177,000 new jobs were created in the economy, after over 200k in June. The BLS may downgrade the NFP numbers, as it has done in previous meetings.
Analysts expect that the unemployment rate will remain at 4,1%, its highest level since the year 2021. A second report will reveal that average hourly earnings increased by 0.3% MoM, and then decreased from 3.9% in July to 3.8%.
These numbers, if accurate, would indicate that the Federal Reserve may want to reduce interest rates at its meeting in September. Jerome Powell said in his Wednesday statement that the Federal Reserve left it open to a possible rate reduction during September.
Before the Fed’s next meeting, it will be receiving several key economic figures. This month, the Fed will be receiving US Consumer Price Index and Personal Consumption Expenditure reports.
Jerome Powell is then expected to give a hint about a possible rate cut during the Jackson Hole Symposium, which will take place in August. Bob Michele is an analyst with JPMorgan.
He’s trying to send the message in as many different ways that, unless there is a dramatic change between now and then (September), they will start cutting rates by a quarter-point at this meeting.
Carry trade unwinding
As investors unwind the carry trade, the US dollar index is also likely to be pressured.
Carry trades are situations where investors lend from assets with low interest rates to those that yield higher returns. Many investors in the last few years have used loans from Europe and Japan for US investments.
This is the most significant carry trade unwinding, as the USD/JPY rate has fallen sharply over the last few days. The drop in the USD/JPY exchange rate was accelerated by the Bank of Japan ‘s second interest rate increase of the year.
The Bank of Canada has been reducing interest rates in Canada as economic conditions continue to deteriorate. In Europe, the European Central Bank cut rates at its last meeting.
On Thursday, the Bank of England will begin to cut interest rates. The cut in interest rates will widen the gap between US and UK returns, but the effect will be minimal if the Fed indicates that they will reduce rates by September.
The Federal Reserve’s actions have historically had a large impact on the value of other currencies.
Forecast for the US Dollar Index
DXY Chart by TradingView
On the daily chart we can see the DXY formed a double top pattern. It was $106.11. This pattern, according to price action analysis is a popular bearish sign in the market. The price was trading near its neckline.
The US dollar index also has a triangle pattern that is symmetrical, shown in black. The triangle has reached its convergence level and could have a major move ahead. This will cause the US Dollar Index to have a negative breakout. The next level of interest is at $103, which could be a significant point.
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The post US Dollar Index (DXY), nearing a pivotal point ahead of NFP Jobs Data may be updated as new information becomes available
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