The US dollar remained largely supported following the Fed’s dovish rate cut and Powell’s hawkish press conference on Wednesday. The economic calendar is light today, but there are number of macro events taking place in the week ahead which could impact the US dollar forecast. As far as today is concerned, well, all eyes will be on the scheduled call between President Trump and China’s Xi Jinping. TikTok’s US future will be the headline, but any hint of progress on broader trade could easily spill over into risk assets, and risk proxies such as the Aussie and the Kiwi. Still, the dollar feels a touch rich after the Fed, and I’d expect some pullback in the coming sessions given the Fed’s pivot. In the bigger picture, with the Fed now in easing mode, it would take a consistent run of stronger-than-expected economic data to materially shift the tide back in favour of the US dollar.
Dollar forecast: Jobless claims lend support, but outlook still soft
The dollar found some unexpected strength yesterday after a sharp drop in weekly jobless claims., which came hot on the heels of the retail sales bear. Initial claims fell back to 231K, reversing the prior week’s spike to 264k, while continuing claims also surprised to the downside. Rare good news for the US jobs market – and enough to keep the greenback supported following the Fed’s policy decision in mid-week. Still, I am not convinced the dollar’s resilience will last for long. The Fed’s dot plot is pointing clearly to more cuts this year – two, in fact – and payroll trends still flag a labour market losing momentum. So, it’ll take a lot more than one decent jobless print to change that.
Among the pairs to watch is the USD/JPY after a hawkish surprise from the Bank of Japan overnight. The BoJ left rates unchanged as widely expected, but the decision was far from uneventful. Two members broke ranks and voted for a hike – a rare hawkish twist. Add to that the announcement of a gradual reduction in ETF holdings, and the signal is clear enough: the BoJ is edging towards the exit. If the yen gains strength in the coming days, then this too could provide a negative influence on the dollar forecast via the US dollar index.
Dollar forecast: Week ahead
There are a number of macro events that could impact the US dollar forecast in the week ahead, including global PMIs on Tuesday, the SNB’s rate decision on Thursday and more importantly the Fed’s preferred US inflation gauge – the core PCE price index – on Friday.
- Global PMIs
Tuesday, September 23
Surgery-based data such as the PMIs are considered to be forwarded looking and can sometimes carry more weight than hard data. Keep an eye on prices paid sub-indices for UK numbers, employment for US and overall headline figures for Eurozone given where the focus is for central banks in each economic regions. In the UK, it is still concerns about inflation that is preventing the BoE to cut rates further, so any improvement on that front should be net negative for the pound and mildly positive for the dollar forecast. The EUR/USD could rebound if Germany’s PMIs show signs of improvement, while the dollar index could resume its own slide should the PMIs reveal further weakness in employment.
- SNB rate decision
Thursday, September 25
The Swiss franc has been appreciating significantly in recent times even though interest rates are back at zero in Switzerland. While there were talks of going back below zero for the first time in three years amid concerns over impact of US tariffs, forecasts now point to no change after inflation accelerated slightly and stayed within its target range for three months in a row.
- Core PCE
Friday, September 26
The Fed cut rates as expected this week, and signalled two more are on the way before year end, but Powell’s caution that “there are no risk-free paths” reflects the tightrope the Fed is walking. One area of concern remains over tariffs, which risk reviving inflation. So, while the focus has shifted to signs of weakening labour market, inflation could return to centre stage if we start to see some above-forecast readings. As well as this, the Fed’s favourite inflation gauge, we will have the UoM Consumer Inflation expectations survey to look forward to on Friday of the week ahead.
Technical dollar forecast: DXY key levels to watch
The US dollar bounced back during Powell’s press conference on Wednesday, which naturally raises the question: have we seen, at the very least, a temporary low in the greenback? Looking at the dollar index, the market did dip to test liquidity just below July’s low at 96.37 before rebounding. The lack of further downside follow-through suggests we may have a possible double bottom forming. Then again, it could simply be a short-lived bounce that loses momentum as the week unfolds. For now, it’s too early to turn bullish on the dollar forecast from a tactical viewpoint. More evidence will be required before that case can be made.
What we can say with confidence is that some key levels are now in play, and how price behaves around them will determine the near-term direction. The one that really matters in the short run is 97.07 – that’s Wednesday’s high, and the immediate post-FOMC peak. As long as the index can stay above that mark, the path of least resistance might well have tilted to the upside in the near-term. Should it slip back under, however, we’d be looking at a false break and the potential for renewed dollar selling. If that happens, July’s low at 96.37 will come back into focus.
On the upside, resistance is already being tested at 97.62 on the Dollar Index chart, which was previously an area of support before the breakdown. That level has been prodded several times and, for now, it’s holding – though the session is still young. A sustained move above here would put 98.60 in play as the next key resistance. Beyond that, the more significant barrier lies in the shaded region around last September’s swing low, converging with the psychologically important 100.00 mark. Unless that area gives way, any strength in the dollar should be taken with a pinch of salt, as it could simply be a counter-trend rally before the downtrend reasserts itself.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
