Dollar May See Short-Term Rebound as CPI Cools Rate-Cut Expectations

Summary:

The U.S. dollar might see a short-term rebound in the coming trading days due to cooling rate-cut expectations. This will persist until new data prompts the market to reprice and reach a consensus.

BUY USDX

EXP

EXPIRED

102.232

Entry Price

103.400

101.839

100.900 +0.120 +0.12%

Pips

EXPIRED

101.839

102.190

Exit Price

102.232

Entry Price

103.400

Fundamentals

The U.S. headline CPI rose 0.2% from a month ago and increased by 2.9% from a year earlier in July. The core CPI rose 0.2% month-over-month and 3.2% year-over-year. While the data wasn't perfect, it was sufficient to pay the way for a September rate cut by the Fed, but it did not strongly indicate a 50-bps cut.

The main contributor to this month's inflation was housing, a persistent inflationary issue. This demonstrates the resilience of core inflation, suggesting it will decline slowly rather than rapidly.

Since the market had already priced in a September rate cut, and the data wasn't strong enough to support a 50-bps cut, the U.S. dollar reacted minimally to the data—just falling slightly before rebounding and recovering losses.

After the data release, Chicago Fed President Goolsbee expressed increased concern about the labor market rather than inflation. He noted that the recent rise in unemployment might reflect more people entering the workforce, but he also said it could signal worsening conditions. If this trend continues, the focus might need to shift more towards employment.

Goolsbee's comments suggest a shift in focus from inflation to labor market issues. Further comments from other Fed officials will clarify if this view is shared within the Federal Reserve. As a dovish Fed official, Goolsbee's remarks are noteworthy.

Goolsbee said on August 8 that the job market is cooling, but whether it will remain stable or continue to deteriorate after falling back to a stable level of full employment is not something that can be answered by one month's data. Longer-term trends are crucial.

Given Goolsbee's previous remarks, his comments yesterday suggest his concern about a deteriorating labor market. If the labor market worsens, typical measures include rate cuts to stimulate employment. If the situation becomes more challenging, a 50-bps cut might be considered, though Goolsbee's stance on this isn't definitive. It will depend on upcoming labor-market data. But at least that means Goolsbee is currently not opposed to it.

Atlanta Fed President Bostic, after PPI data exceeded expectations, stated his support for a rate cut by the end of 2024. Bostic said he's looking for "a little more data" before supporting a reduction in interest rates, emphasizing he wants to be sure the U.S. central bank will not have to change course once it begins cutting. His statement aimed to temper market optimism from the PPI data. By the way, Bostic is one of the few Fed policymakers willing to state an exact time frame for rate cuts.

Currently, Goolsbee's openness to a 50-bps cut suggests potential divisions among Fed officials on the extent of the rate cut. Markets are also guessing whether the Fed will cut by 25 or 50 bps in September. Top Wall Street firms have agreed that if August's non-farm payrolls are weak, the Fed is likely to cut by 50 bps. If data improves, a 25-bps cut is expected. The challenge is that the market expects a total cut of 100 bps this year, implying a 50-bps cut in September is necessary.

Given current data, lowering rates by 100 bps for the rest of this year seems unlikely, suggesting that the U.S. dollar might be driven by cooling rate-cut expectations in the coming days until new data causes the market to reach a new consensus.

Technical Analysis

In the daily chart, the U.S. Dollar Index is currently supported by an uptrend line, which has previously supported the dollar in July and December 2023. A break below this line could initiate a new downtrend. The resistance comes from the lower boundary of a downward channel and the 0.5 Fibonacci retracement level, acting as strong short-term resistance. Only a break above this line will stop the dollar's decline. In the short term, the dollar index might oscillate within this range.

In terms of indicators, in the Ichimoku Kinko Hyo, both the baseline and the conversion line are showing a downward trend, indicating that the U.S. dollar index will see a strong decline, but the current price is moving far away from the baseline. Considering the reaction of the U.S. dollar index to the July CPI data and the current critical level, we recommend investors try to go long on it. Dollar May See Short-Term Rebound as CPI Cools Rate-Cut Expectations_1

Dollar May See Short-Term Rebound as CPI Cools Rate-Cut Expectations_1

Trading Recommendations

Trade Direction: Buy

Entry Price: 102.232

Target Price: 103.4

Stop Loss: 101.839

Support: 102.23, 101.75

Resistance: 103.4, 104

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