USD Stabilizes Amid Mixed Signals and Adjusted Easing Expectations
In recent trading sessions, the US Dollar (USD) has demonstrated notable resilience, maintaining stability above the 103.00 level despite fluctuating market conditions. This stability is driven by a balancing act between improved risk sentiment and ongoing adjustments in Federal Reserve policy expectations. Recent job market data and geopolitical tensions have further complicated the outlook. This week’s analysis delves into the USD’s current position, supported by steady Treasury yields and safe-haven flows amidst rising geopolitical risks. We’ll explore the nuanced shifts in market sentiment, including a detailed look at Smart Money Indicators, labor market fundamentals, and economic growth data. Additionally, we’ll break down key technical signals from recent charts to forecast potential movements. As we look ahead, keep an eye on upcoming Consumer Price Index (CPI) and Retail Sales data, which will be critical in shaping future economic expectations and Federal Reserve actions. Join us as we navigate the USD’s path and prepare for the week ahead.
USD
The US Dollar (USD), represented by the US Dollar Index (DXY), has demonstrated resilience in recent trading sessions, maintaining stability above the 103.00 level despite fluctuating market conditions. This stabilization comes amid a period of sideways movement, driven by a balanced risk sentiment and minimal fresh economic data.
Recent developments have painted a complex picture for the USD. The dollar's stabilization is supported by a recent rebound in risk sentiment and a flat trading pattern in US stock index futures following a rally. The 10-year US Treasury yield remains around 4%, underscoring a steady market backdrop. However, the outlook for the USD is shaped by ongoing adjustments in expectations for Federal Reserve (Fed) monetary policy.
Federal Reserve officials have offered a cautiously optimistic view on the US labor market, despite slower job growth. Officials such as Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee have indicated that while inflation is nearing target levels and the labor market shows resilience, the current economic conditions do not warrant aggressive rate cuts at this time. Recent jobless claims data, which came in lower than expected at 233,000, has helped temper concerns about economic weakness.
The market is now pricing in a more nuanced view of future Fed actions. While there is less than a 10% chance of an immediate rate cut, there is an approximately 80% probability of a 25-basis point cut in September. Overall, markets are still anticipating a total of 100 basis points of easing by the end of the year and 175-200 basis points of total easing over the next 12 months.
Despite these adjustments, the USD's decline has been mitigated by increased safe-haven flows due to rising geopolitical tensions in the Middle East. Recent escalations, including intensified airstrikes and heightened regional conflict, have bolstered demand for safe-haven assets.
In summary, while the US Dollar shows stability amidst a backdrop of mixed economic signals and adjusted rate cut expectations, market sentiment remains fluid. The upcoming Consumer Price Index (CPI) and Retail Sales data will be critical in shaping future economic expectations and potential Fed policy actions.
Smart Money Indicators
Looking at the COT data, we see over all long positions. With a -2.8% net change this week we have a slight increase in short positions vs long positions this week. We note an above 5% increase in open interest. Compared to the last previous weeks 1%.
A view of seasonality shows us a bullish week is favorable.
Fundamentals
Labor Market Data
NFP -Way less than expected (weak)
ADP - less than expected (weak)
Unemployment claims - lower than expected (strong)
Job Openings - higher than expected (strong)
Unemployment Rate - Slow increase (weak)
Wage Growth - slight decline (weak)
Based on the data we can say the labor market is weak; with a 2/6 rating
Economic Growth
GDP - Higher than expected (strong)
Services PMI - as expected/above 50 (expansion)
Manufacturing PMI - less than expected/below 50 (weak)
Retail Sales - Higher than expected (strong)
Based on the data the economic growth is strong; with a 3/4 rating
Inflation Data
3% - slow decline (neutral)
(above 3% is high inflation below 2% is low inflation)
Interest Data
Yield Curve - inversion (recession pending)
Business Forecast - a decline in sales after end of year
Sol Analysis
Lets dive into chart analysis, I like to pair the dollar with usd/jpy for crack in correlations. First I want to note last week I said we would sweep the sell side liquidity and reverse & that is exactly what price has done https://www.tradingview.com/x/svJ85Gnr/ now there is not a 100% clear SMT between the two. But we can note that the FVG on usdjpy was filled but it was not on dxy. (note this is the weekly chart)
On the 4hr chart we see the clear bullish SMT setting price higher, with dxy creating a lower low while usd/jpy fails to https://www.tradingview.com/x/zB3NlHdG/
On the daily chart we can see a bearish SMT, which gave us bearish candles to end the week, https://www.tradingview.com/x/ylRtxIu4/ With everything being said we only can rely on the 3 different news drivers for the week ahead. I think the dollar has potential upside from this point.
