US Dollar Forecast: Will Fed Chair Powell Inject Further Momentum at Jackson Hole?

US DOLLAR FORECAST: NEUTRAL

• US Dollar Benefits from China Concerns, Upbeat Data and Hawkish Fed Minutes.
• Attention Now Turns to Jackson Hole as the DXY Remains at a Key Inflection Point.
• DXY Eyes Jackson Hole and China Developments for Guidance on its Next Move.

CHINA CONCERNS ASSIST US DOLLAR INDEX (DXY) TO ANOTHER WEEK OF GAINS

Pipscollector.com - The US Dollar has extended its gains to a 5th consecutive week on the back of hawkish Fed Minutes, Rising Treasury yields and safe haven flows. The week has been dominated by the narrative out of China driving overall sentiment and weighing on risk assets.

Over the weekend news filtered through that one of the largest private property developers in China Country Garden was unable to meet its obligations to investors, this was followed by Zhongrong International Trust who failed to make payments on its bonds.

Calls ramped up for the Chinese government to intervene which came in the form of the steepest rate cut in 3 years which seemed to have limited impact. There seems to be some hesitancy from Chinese authorities on a massive stimulus package, but they may have no choice.

Around 5 investment banks have now downgraded growth prospects for 2023 in a turn of events considering China’s initial target of 5.5% growth was seen by some as pessimistic earlier in the year. At present that is looking rather optimistic as it seems daily there are new concerns coming out of the Dragon Nation.

Evergrande Corporation files for bankruptcy

On Friday China’s Evergrande Group filed for Chapter 15 Bankruptcy in New York as it works on restructuring deals in Hong Kong and the Cayman Islands in a further nod to the ongoing turmoil. Fears of contagion have certainly been doing the rounds as comments were heard from various Central Banks including US treasury Secretary Janet Yellen who described it a risk factor to the American Economy.

The impact of all of this saw markets adopt a relatively risk-off approach for the majority of the week which in turn kept the US Dollar largely supported on safe-haven flows. On Monday we will see if the PBOC cuts the prime rate 1Y and 5Y and if that may have any sort of lasting impact on sentiment as the new week begins.

US DATA AND FED MINUTES RELEASE

The Dollar also received a boost on the data front with US retail sales posting an upside surprise with Industrial production following suite. The labor market remained robust with initial jobless claims coming in slightly better than expected at 239k.

The Fed minutes release although giving what I would call mixed messaging also kept the US Dollar bid this week with Fed officials largely seeing the potential for further hikes. The mixed messaging though came as Fed officials also remain concerned about over-tightening. The net effect however did see a rise in the DXY while risk assets seemed to falter following the release.

US TREASURY YIELDS

US Treasury Yields saw a slight pullback on Friday following huge gains for the longer-dated treasuries in particular with the US 10 Y hitting highs last seen in 2008. The US 2 Y on the other hand took out last week’s highs but didn’t have the same aggressive move as witnessed on longer dated yields.

US 2Y and US 10Y Yields

THE WEEK AHEAD: JACKSON HOLE SYMPOSIUM AND MID-TIER US DATA

Heading into next week and we have quite a bit of mid-tier US data as well as some high impact data. However, the biggest risk event next week will no doubt be the Jackson Hole Symposium with last year's event stoking some serious volatility and could be a determining factor in the US Dollars direction ahead of the September Fed Meeting.

We do have durable goods order and the final Michigan Consumer Sentiment numbers as well, but I do expect these to take a backseat to Jackson Hole.

TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at the technical perspective and the Dollar Index has now seen a change in structure on a weekly chart having taken out the previous swing high around the 103.00 handle. This is massive in my opinion as even if we do see the DXY face selling pressure it could be nothing more than a retracement before the next leg to the upside.

The Daily chart has also crossed a critical hurdle as we have broken back above the 200-day MA, the first time since November 2022. Of course, it is important to note that the RSI (14 is hovering close to oversold conditions and we do remain below the long term descending trendline which could see a pullback in the early part of next week.

A lot of the early week moves on the DXY could depend on the risk tone we begin the work with particularly with the interest rate decisions from China as well as any further contagion from the real estate sector.

US Dollar Index (DXY) Daily Chart – August 18, 2023

Key Levels to Keep an Eye On:

Support Levels

• 103.20 (200-day MA)
• 102.34 (100-day MA)
• 101.75

Resistance Levels

• 103.67 (weekly high)
• 104.28
• 105.00 (psychological level)

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