INTENDED USE: Trade planning guidance for the US Dollar.
DERBYSHIRE GB / AUGUST 8th, 2023 - Updated following the labour report. Next update is expected after the CPI data on Thursday, August 10th or before if any significant event occurs.
Macroeconomic Snapshot
FEDERAL RESERVE (FED), FEDERAL OPEN MARKET COMMITTEE (FOMC): The July meeting matched expectations with a 0.25% hike of the Fed Funds rate setting it at 5.25%-5.50% which is up from 5.00%-5.25% and the pause in June. The latest rate now matches the Trading Economics Q3 ‘23 forecast of 5.50% which they also identify as the peak. Over the previous three years, since the start of 2020, the interest rate has been trending up with a low of 0.25% and a high of 5.50%. Over the previous six months, the rate has climbed at a slower pace. The next meeting is due on Wednesday, September 20th.
The US interest rate is anticipated to be held at its current level for a lengthy period which is likely to lead to stabilised Treasury yields which may dissuade investors and limit upward support on the value of the dollar.
GROSS DOMESTIC PRODUCT (GDP) GROWTH RATE: Advance Q2 ‘23 estimate greatly beat expectations coming in at a 2.4% annualised expansion, up from 2.0% in Q1 ‘23. The latest report is above the FOMC 2023 change in real GDP forecast of 1.0% (revised up from 0.4%) and far above the Trading Economics Q3 ‘23 forecast of 0.6%. Over the previous three years, since the start of 2020, GDP has been trending up with a low of 3.9% and a high of 7.0%. Over the previous six months, GDP has been steadily improving. The second estimate Q2 report is due on Thursday, August 30th.
US GDP is anticipated to deteriorate this year which may decrease investor confidence in US stocks which may limit downward pressure on the value of the dollar.
CONSUMER PRICE INDEX (CPI): June ‘23 report slightly beat expectations coming in at 3.0% which is a lot lower than the 4.0% in May ‘23. The latest report is now below the FOMC 2023 PCE forecast of 3.2% although Trading Economics are more optimistic with a Q3 ‘23 forecast of 2.5%. Over the previous three years, since the start of 2020, CPI has been trending up with a low of 0.1% and a high of 9.1%. Over the previous six months, the rate has been falling quickly. The July report is published on Thursday, August 10th.
US CPI is anticipated to improve further this year and reach the target rate of 2.5%, investor confidence in EA stocks is likely to improve which may limit upward support on the value of the dollar.
LABOUR: July ‘23 report slightly beat expectations coming in at 3.5% which is also slightly better than the 3.6% in June ‘23. Nonfarm payrolls stayed similar at 187K from 185K although that was significantly revised down from 209K. The latest report is below the Trading Economics Q3 ‘23 forecast of 3.8%. Over the previous three years, since the start of 2020, Unemployment has been trending down with a high of 14.7% and a low of 3.4%. Over the previous six months, unemployment has been steady. The August report is due on Friday, September 1st.
US unemployment is anticipated to slightly deteriorate this year which may dissuade investor confidence in US stocks which is likely to limit downward pressure on the value of the dollar.
MONETARY POLICY HOLD: As inflation in the US stabilises, the Fed now intends to hold rates steady. This makes borrowing less risky which will improve the outlook for growth, increase the appetite for stocks, and reduce the demand for the dollar as a safe haven.
This is likely to limit upward support on the value of the dollar.
RUSSIAN INVASION OF UKRAINE: The war is having a detrimental effect on the global and US economy by causing higher energy prices, higher food prices, higher inflation and is impacting economic growth.
This is likely to limit downward pressure on the value of the dollar.
CHINA-US TRADE WAR: The trade war is having a detrimental effect on the global and US economy by causing higher prices for consumers, increased uncertainty for businesses, disrupted supply chains, job losses and is impacting economic growth.
This is likely to limit downward pressure on the value of the dollar.
DXY Longer Term (Previous Three Months)
The US Dollar Index (DXY) has formed a downtrend since the start of June when investors began to price a lower peak interest rate which weakened the dollar. This dovish sentiment has been retraced three times as the Fed consistently remained hawkish. The DXY is currently retracing from the lows below 100.00 and testing the 61.80% fib. The downtrend will be broken on moves beyond the 78.60% level near 103.50.
DXY (Previous Three Weeks)
The US Dollar Index (DXY) has gained value over the previous three weeks, supported by a strong economy although NFP has stalled the climb. The index is testing the 50 day moving average.
US Dollar Index (DXY) Outlook
Upcoming and Recent Events:
Tuesday, August 1st
US JOLTS Job Openings improvement to 9.6M exp. from 9.8M prev.
Wednesday, August 2nd
US ADP Non-Farm Employment Change Big fall to 195K exp. from 497K prev.
Friday, August 4th
US Average Hourly Earnings slight fall to 0.3% exp. from 0.4% prev.
US Non Farm Payrolls fall to 200K exp. from 209K prev.
US Unemployment Rate remain at 3.6% exp.
Thursday, August 10th
US CPI y/y climb to 3.3% exp. from 3.0% prev.
CME Group 30-Day Fed Fund futures
September: rising sentiment of a hold, 86% in favour (from 81%), 14% for a 0.25 hike (from 19%)
November: rising sentiment of a hold, 70% in favour (from 65%), 28% for a 0.25 hike (from 30%)
Six Month Bond Yields
Treasuries: slightly rising at 5.53% from 5.49% last week
Value of the US Dollar Index (DXY) to remain above 101.5 unless the US CPI report comes in lower than expected on Thursday: The previous three week moves have been trending up from 99.50 to 102.9. Events this week are favoured towards a slightly stronger USD as the CPI is anticipated to rise.
Longer Term Value of the US Dollar Index (DXY) to remain below 103.5: The previous three month moves have created a downtrend falling from 104.70 to 99.60 although it has retraced to test 102.60. The macroeconomic situation suggests the downtrend is likely to continue.
Gavin Pearson
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