US Dollar (DXY): Central Bank Decisions Likely to Fuel Turbulent Trade

Highlights

• US Dollar surges against currencies, Euro experiences steep drop.
• Investors focus on Fed meeting, rate increase expected.
• Central bank meetings, economic data, and earnings reports generate market turbulence.

Overview

Monday saw the US Dollar (DXY) surge against a basket of currencies, particularly the Euro, which experienced a steep drop. However, the bullish momentum couldn’t be sustained due to a wave of uncertainty looming over the market this week. The main focus lies on the upcoming Federal Reserve meeting on Wednesday, where investors anticipate a quarter percentage point rate increase. All eyes will be on Chair Jerome Powell’s comments as the central bank navigates a soft landing for the economy.

Market participants are also closely monitoring the release of the personal consumption expenditures index, the Fed’s preferred inflation gauge, due at the end of the week. Additionally, the advance estimate for second-quarter economic growth is scheduled for Thursday, with economists predicting a 1.7% annualized pace for the April-through-June period, according to the Commerce Department.

The Euro experienced a slide on Monday, prompted by disappointing activity data from key economies, raising concerns as central bank meetings in Europe and the United States approach, where rate hikes are expected. The European common currency dropped 0.4% to $1.1083 after PMI data revealed a significant contraction in euro zone business activity in July. Similarly, the British pound was affected by activity data but to a lesser extent, down 0.1% at $1.2839.

The potential slowdown in euro zone growth could impact portfolio inflows, potentially hindering the euro from returning to its pre-Ukraine war levels against the dollar, ranging from $1.12 to $1.20.

This week holds many crucial events for investors, including central bank meetings for the Federal Reserve, the European Central Bank (ECB), and the Bank of Japan. Market participants are expecting both the ECB and the Fed to raise rates by 25 basis points, with a particular focus on the signals they provide for their September meetings. Should inflation gauges soften, the Fed might hint at a potential pause in rate hikes.

Investors are cautiously optimistic about a soft-landing scenario for the US markets, where the Fed concludes its rate hikes and anticipates a gradual decline in CPI without a recession.

Among the central banks, the Bank of Japan (BOJ) is seen as the most likely to spring a market-moving surprise, potentially tweaking its yield curve control policy. The yen strengthened against both the dollar and the euro.

Financial markets will be closely watching for any adjustments to the BOJ’s YCC program, as such changes could signal the beginning of a policy tightening cycle. In this scenario, USD/JPY and EUR/JPY might lose around 24 yen on the day.

With central bank meetings, economic data, and earnings reports from heavyweight companies on the agenda this week, investors are bracing for further turbulence in the financial markets.

Technical Analysis

The US Dollar Index saw a slight decline, with the current 4-hour price at 101.203, still above both the 200-4H moving average (100.293) and the 50-4H moving average (101.192). This suggests a potential bullish sentiment as the market remains above its long-term and short-term moving averages. The 14-4H RSI at 64.59 indicates lingering bullish momentum, although it has moved away from overbought levels.

The market is cautious, hovering above the main support area (99.630 – 100.016) but below the main resistance area (103.280 – 103.424). Close monitoring is essential for potential shifts in sentiment.