The dollar has resumed lower after a short-lived bounce following Powell’s speech on Thursday, as investors bet the Fed’s new approach, i.e. average inflation targeting, will mean low rates for even longer.
The EUR/USD climbed above the 1.19 handle this morning after breaking above Thursday’s high, before easing back down a little. The weakness for the dollar also helped to support buck-denominated precious metals, with
gold shining brightly as it tested $1955 resistance.
Traders are evidently not looking too far ahead and are selling the dollar now and will be asking questions later, as they take advantage of the strong momentum. One longer-term concern is that if the Fed allows inflation to overcook by not reacting fast enough, then it may have to tighten its belt more aggressively when it finally does start its hiking cycle in order to bring prices back under control. Such a policy response will stifle economic growth and will most likely send the dollar soaring higher. However, that is something to worry about at some later point in time. Right now, though, investors are convinced rates will not be going up any time soon. So, the trend of short dollar, long stocks, gold and bonds remain intact.
Indeed, the EUR/USD bears had many opportunities to push the exchange rate lower, but so far they have been unsuccessful. Their failure is music to the ears of the bulls who are now aiming for 1.20+ as rates try to establish a base above prior resistance around the 1.1900 area. Acceptance above this level would suggest 1.20 could be hit by early next week, or potentially later in the afternoon with the help of fresh dollar selling once US investors come into play. This bullish view would remain intact for as long as rates don’t create a reversal pattern such as
THESE ones I have put together on YouTube.
Source: TradingView.com and ThinkMarkets
In the afternoon, we do have some US macro numbers to keep an eye on, which may provide some upwards pressure on the dollar if they turn out to be better than expected. These include Core PCE Price Index, Personal Spending and Chicago PMI. Also watch out for further central bank speeches at the Jackson Hole Symposium. The BoE’s Bailey will be speaking at 14:05 BST, which could impact the GBP and other UK assets. The focus will then turn to the week ahead, when will have among other things the latest US monthly jobs report. I will provide a week ahead preview later this afternoon. So, stay tuned.