Dollar struggles for a key turning point: The US dollar is facing a key turning point as employment data dampens expectations for a 50-basis point rate cut by the Fed. While the stock market saw a decline, the USD rallied, reflecting investor interest in short-term bonds and the dollar as a safe haven. With the probability of a 50 bps cut falling to 30%, focus shifts to the upcoming CPI report and the Fed’s confidence in the economy. The dollar index reversed from key support near 100.5, maintaining historical levels.
Dollar struggles for a key turning point
After an initial decline, the USD began to rally on the back of US employment data that dampened
expectations of a 50-basis point rate cut by the Fed in September.
The US employment data, which triggered a fall in the stock market, led to a wave of USD buying,
although a similar sell-off in early August put pressure on the USD. The correlation between equity
and currency markets can be either positive or negative. Still, historically, the negative correlation is
more persistent: a weaker USD stimulates interest in equities. In contrast, a sell-off in equities drives
investors into short-term bonds and the USD as a safe haven.
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The probability that the Fed will cut rates by 50 bps in September has fallen to 30%, leaving 70% for a
typical 25 bps cut. Friday’s report showed that the economy is creating jobs at a near-trend pace, the
unemployment rate remains historically low, and wages are rising faster than inflation. While slowing
inflation and job growth do not preclude a rate cut from multi-year highs, there is no need for
emergency action.
Expectations reversed about an hour after the NFP was released as market participants delved into
the report’s details. This followed a wave of speculative dollar selling triggered by the gap between
forecasts and actual data.
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As a result, the dollar index reversed to the upside from key support near 100.5, a reversal area from
last December. Near these levels, the dollar has repeatedly reversed from declines to gains since
May 2022. Between 2015 and 2020, dollar sales around these levels intensified, preventing the dollar
from consolidating higher for a long time.
Other long-term technical signals include a reversal from the 200-week moving average and a return
from overbought territory on the RSI.
We noted the importance of this line a few weeks ago, suggesting that the dollar sell-off could
accelerate without a change in market sentiment. The pendulum has swung in the dollar’s favour in
recent weeks. However, it will take strong US CPI and Fed confidence in the economy to keep the
DXY above this historic reversal area.
