The dollar finds its footing, but the Fed holds the cards

The dollar finds its footing, but the Fed holds the cards

The US dollar has shaken off its fears and gone on the counterattack. The Fed is still dependent on data. It does not allow for a 50 basis-point cut in the federal funds rate in September and a 150–175 basis points cut in the cycle. US Treasury Secretary Scott Bessent noted these figures as possible outcomes based on economic models, but stressed that he was not directing the Fed to act. Foreign investors are reducing their hedging of risks associated with owning US assets. Other countries continue to buy US Treasury bonds. Is the USD index oversold?

Ahead of Jerome Powell's speech in Jackson Hole, speculators were unwinding their short positions on the US currency. This resulted in a pullback in the USD index. Donald Trump was able to stop it for a while.  The US president called on FOMC member Lisa Cook to resign for alleged mortgage fraud. The White House is intent on filling the Committee with its own people, turning the central bank into a puppet and aggressively lowering rates. The erosion of confidence in the Fed is a bearish factor for the dollar.

A separate factor is expectations for the key rate, where investors have reduced the chances of a 25-point rate cut to 73%. This is a significant fundamental driver of the dollar's growth over the past week and a half, when dovish expectations peaked: markets priced in a 100% chance of a 25-basis-point cut and a 6% chance of a 50-basis-point cut.

The dollar index is comfortably above its 50-day moving average, reflecting a shift in sentiment to bullish after a period of decline. However, early speculation is risky until Powell has had his say, confirming or refuting the expectation of a rate cut in September and, in general, a transition to active easing with three cuts before the end of the year.

By the FxPro Analyst Team