Trade Of The Week: Are USD Bulls Throwing In The Towel?

The mighty dollar has been an unstoppable force in 2022, flattening everything in its path.

But back in August, we questioned whether the king of the currency markets was losing its grip on the FX throne after the Dollar Index (DXY) punched above 109.14. Our argument was based on reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures.

We were thoroughly humbled after USD bull's stepped into higher gear, pushing the DXY to a fresh 20-year high beyond 110.00

There was also some action on the equally-weighted dollar index which respected a bullish trend, pushing prices above the previous 2022 high of 1.2184.

Fast forward to today, king dollar looks shaky.

It lost momentum last week and has stumbled into the new week under selling pressure. The greenback has weakened against most G10 currencies month-to-date and could extend losses despite the recent hawkish comments from Fed officials including Jerome Powell.

With inflation cooling in the US economy, this could encourage the Fed to drop its aggressive stance toward higher rates. If such becomes reality, dollar bears may receive the thumbs up to enter the scene – dragging both the DXY and equally-weighted USD index lower.

As we questioned back in August, are dollar bulls throwing in the towel or just taking another break before ramping up the momentum in Q4? Some clues may be offered this week in the form of the US inflation figures among other key reports.

The low down…

Traders are predicting an 88% probability of a 75-basis point rate hike in September.

These expectations were supported by comments from Federal Reserve Chairman Jerome Powell who reaffirmed the need to fight soaring inflation. Hawkish comments by Fed officials last Friday also boosted rate hike bet, making another Fed super-sized rate hike this month almost a done deal.

Interestingly, the greenback has tumbled despite the Fed expected to hike rates by 75 basis points for the third time in a row. Fed hawks are clearly in the building and strong US economic data continues to stimulate expectations that the US central bank would not be slowing the pace of hike anytime soon. However, US inflation likely slowed for a second month in August thanks to falling gas prices. While this may not be enough to derail the Fed from firing another monetary bazooka this month, it may impact the central bank's decision in November and December.

The week ahead…

This could be another wild week for the dollar due to the pending US economic reports.

On Tuesday, the latest inflation figures will be published which are expected to show consumer prices cooling 8.1% year-on-year in August. This would be lower than July 8.5% print and would mark two straight months of easing in the headline annual print. Should the report match expectations, this could allow the Fed to drop its aggressive approach toward rate hikes – resulting in a weaker dollar. It will be wise to keep an eye on the core CPI annual print which is expected to rise 6.1% - which will be the highest level since April. 

Much attention will be directed towards the weekly initial jobless claims, August retail sales, and industrial production figures on Thursday which could provide further insight into the health of the US economy. A strong set of reports may reinforce rate hike bets which is dollar positive, while a negative set of reports could dampen aggressive rate hike expectations – dragging the dollar lower.

Friday offers the US consumer sentiment for September. Consumer sentiment was revised higher to 58.2 back in August and is expected to hit 60 this month. A positive figure could provide USD bulls a helping hand before the week comes to an end.

Time for dollar to tumble?

After failing to secure a weekly close above 1.2184, the equally weighted dollar index could be preparing to tumble lower.

Prices remain under pressure on the weekly charts with a solid breakdown below 1.1900 opening a path toward 1.1700 and 1.1600, respectively. Should 1.1700 prove to be reliable support, a rebound back towards 1.1900 could be a possibility.

USD FED inflation Powell Fed rate hike SMA MACD