The Dollar Breaks Out; New Highs In Sight

The Dollar Index Has Broken Out To New Highs

The Dollar Index got a boost from last week’s slate of economic data, data that belies the idea of impending U.S. recession. No single data point was what I would call robust but neither was there a weak one. GDP was revised lower for the 2nd quarter but less than expected and still 2.0%. Labor markets remain tight. Income and spending are on the rise. Inflation is steady and expanding if still below the Fed’s 2.0%. Manufacturing rebounded. I don’t know what else to say other than those who are expecting two more rate cuts this year are going to be disappointed.

The FOMC has made it abundantly clear they are not in a rate-cutting cycle. The last cut was a mid-cycle adjustment making up for the one hike too-many of last fall. Since then the data has been supportive of economic expansion if not acceleration and suggests a single cut may be all it takes to stimulate a little more activity. This week’s data is going to be important too, it’s the first of the month so we’ll get key reads on employment and activity in the manufacturing and services sectors. Strong numbers, even only steady and stable numbers, are going to firm the dollar because they’ll point to FOMC patience, not rate cuts.

The CME FedWatch Tool shows a chance of no more rate cuts has entered the market. The odds are small but present all the way out to December of this year which is a new development. I expect to see this figure creep higher over the next two weeks, mostly because the FOMC aren’t going to do what the market wants and that is indicate deep rate cuts.

A look at the DXY shows a very strong index, one that is gaining against the basket of world currencies despite the dovish FOMC outlook. the reason for the move is twofold. On the one hand there is a growing chance of policy easing from the BOE, ECB, BOJ, RBA and other major world central banks. And China is devaluing the yuan. Expect the dollar to rise significantly, that’s what I say.

On the weekly chart, the DXY is moving up from a major support level at $97.50. That support level was tested by correction and confirmed by a six-day rally and march to new high. The indicators are bullish and on the rise with room to move higher so I do expect prices will continue to rise in the near and long-term. The next target for resistance is near the $100 level and will likely be reached in the next week to ten days, within the window of time ahead of the FOMC and ECB meetings next week.

The weekly chart of the EUR/USD highlights the bullish dominance of the dollar. The EUR/USD has been in a protracted downtrend and recently confirmed continuation of that down trend. The candles show solid resistance along the 150-day EMA and now prices are falling from that resistance to new lows. The indicators are consistent with downtrend and showing weakness with stochastics crossing of the lower signal line. A think a move to 1.08000 is not out of the question.