The DXY corrected to the downside and has shown some strength and now expect the USD to work its way higher with dips being buying opportunities...

“Atlanta Fed’s GDPNOW, which usually is a decent “real-time” measure of the economy, is still implying near 3% annualized real growth. Until the FOMC September meeting, we will have one more labour market reports and two more CPI reports, in addition to a number of other data points. We do not think this data will spook the Fed into rescue mode.” (NORDEA)

Cooling inflation will likely open the door for the Fed to start reducing rates in September which is now fully discounted but we still think they will be cautious, cutting by 25bps per quarter. While market-rate perceptions have increased from the lows, the market is still seeing almost 190bps of cuts over the next year. It's worth keeping in mind that the Fed since 2021, markets have been very eager to price in rate cuts that have not materialized which we can see on the chart below.

The market turning dovish on the Fed was down to just one poor payroll report which was an overreaction and we have plenty of data coming up before the next Fed meeting. In terms of data today the U.S. producer price index, a measure of wholesale prices, is published and the consumer price index for July will be released on Wednesday. In terms of PPI consensus is a 0.2% MoM print across headline and core measures is expected and will have no impact in our view. tomorrow’s CPI will generate higher FX volatility with markets likely to focus on the second percentage point decimal in the MoM print (consensus is 0.2%).

“We are generally optimistic that data will fall in line with consensus expectations and continue to endorse market pricing for 100bp of Fed cuts by year-end. An orderly USD decline is our baseline scenario for this and the next few weeks.” (ING) We dont agree we think the bad news is in for the USD and we see the DXY as a buy on the dips or on a breakout higher.

The Fed cutting rates by 100 bps looks very optimistic and so does a 50 bps cut at the September meeting which many in the market are looking for. In our view in light of robust economic growth, sticky inflation and an election coming up in November. If Trump were to win the election his policies would be inflationary so the Fed will in our view be cautious into the event.

We have a lot of events coming up before the next Fed meeting and there listed below with their level of importance.

We are looking for a higher USD with pullbacks being buying opportunities.

Technical Analysis

Our view of the key levels of support and resistance to look out for below.