In terms of the DXY we have been bullish in articles for the last two months and the USD has had a good rise to the upside and we expect the big up trend to continue.
In terms of the DXY while we are long-term bullish we do expect a correction in the short term after US PCE data which we will look at later but first why is the USD going higher longer term?
The USD offers an attractive yield against most other major currencies which we can see on the chart below.
Market pricing in terms of a hike and cuts is in a less hawkish position than the recent dot plot projections by Fed members. The market sees less than a 50% chance of another hike this year and the effective rate being cut to 4.67%. The odds of a hike seem low and so too does the cut to 4.67%.
The market seems to think inflation is tamed but it's unlikely to do as the market thinks.
Inflation though is unlikely to fall quickly as the following charts show.
We expect the USD to have further upside based on yields and market expectations on interest rates being adjusted but it is also supported by two other big fundamentals:
The US economy is far stronger than its rivals and if they have to hike rates due to inflationary pressure or hold rates higher for longer their economies are far weaker than the US.
Global Reserve Status
The USD offers a safe haven in terms of risk-off and when the global economy is slowing so fewer USD go into circulation. Most loans in the global economy are granted in USD so selling dollars for other currencies obviously weighs on the USD. In times of economic contraction, fewer loans are granted and credit lines are withdrawn so fewer dollars are sold in terms of loans and credit lines being curtailed means foreign currencies have to be sold for USD. The following chart shows how the USD dominates global trade.
The global economy is clearly slowing and the chances of a recession are high which will underpin the USD.
As the USD has risen speculative dollar shorts have been taken out of the market – we now expect big speculative money to flip and go long the USD and push the USD to the upside.
PCE Data Friday
Core PCE for August on Friday is expected to have slightly slowed to 3.9% YoY from 4.2%. This could result in a pullback of the USD but, it is unlikely to change the big trend. The index would still be well above the Fed’s objective of 2%, and combined with other data pointing to a still robust economy it is unlikely to change the Fed's “higher for longer” mentality.
Furthermore, the market assigns a less than 50% probability for another quarter-point hike before tightening ends, while it sees interest rates ending 2024 at lower levels than last week’s dot plot are suggesting - we think the probability of another hike is higher than the markets. Any pullbacks in the USD will be buying opportunities in our view.
Many forecasters maintain the USD is overbought but ignore its global reserve status which can come into play and send the USD far higher. Also, keep in mind, we dont have risk-off in the markets in a big way but this is likely to change – We expect far lower stock prices and there are also plenty of global geo-political problems that could come into play.
Below see our views of the key levels of support and resistance to look out for in the DXY.