The U.S. dollar is poised to break a five-week losing streak, currently trading close to a one-week high against major currencies as of Friday. This recovery follows strong U.S. economic data, which has prompted traders to reduce expectations for aggressive interest rate cuts by the Federal Reserve.
The U.S. dollar is showing renewed strength, as reflected in the U.S. Dollar Index (DXY), which is steady at 101.34 after a 0.36% rise on Thursday. This is the index’s highest level since August 22, indicating a growing demand for the dollar amid market uncertainties.
If this trend persists, the dollar is on track to close the week with a solid 0.66% gain, marking its strongest weekly performance since early August.
The chart indicates a steady upward movement in the dollar’s value, with prices staying above key moving averages, which points to ongoing buying interest. The positive shift in the MACD histogram signals that momentum is leaning towards additional gains.
Traders should be mindful of a strengthening dollar’s impact on the global economy. As the dollar gains strength, it can put pressure on other currencies and commodities, potentially affecting broader market dynamics.
The driving force behind this change in market sentiment was the revised U.S. gross domestic product (GDP) data, which indicated an annualized growth rate of 3.0% in the second quarter, an increase from the previously reported 2.8%. This upward revision surpassed expectations, underscoring the strength of the U.S. consumer.
As a result, traders have revised their expectations for the Federal Reserve meeting on September 18. The probability of a 50-basis point rate cut has dropped from 38% to 34%. This more cautious view on Fed easing has bolstered support for the dollar.
In contrast, the euro has faced challenges, hovering close to a two-week low against the dollar. Slowing inflation in Germany and Spain has strengthened the argument for European Central Bank (ECB) easing, adding downward pressure on the euro.
On Thursday, the euro fell to $1.10555, its lowest point in two weeks, and stayed flat at $1.1082 on Friday. With additional consumer inflation data anticipated from France, Italy, and the broader eurozone, the euro’s outlook remains uncertain.
After weakening on Thursday, the yen has been under pressure, remaining close to the closely monitored 145 per dollar level. Even though Tokyo’s core consumer prices increased by a faster-than-expected 2.4% in August, exceeding the Bank of Japan’s 2% target, the yen has largely overlooked this data.
Instead, the increase in U.S. Treasury yields has impacted the yen, which has bolstered the dollar against the yen. On Friday, the dollar dipped slightly to 144.78 yen after hitting 145.55 overnight, its highest level since August 23.
The British pound has held steady, trading at $1.31655 after dropping to $1.3146 on Thursday. The upcoming release of the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, could significantly impact the market, particularly the dollar’s movement.
The tempered expectations for aggressive Fed rate cuts and a stronger-than-anticipated U.S. economy indicate that the dollar may maintain its support in the near term.
However, upcoming inflation data from both Europe and the U.S. could bring new volatility, especially for the euro and yen, as markets adapt to shifting economic conditions.
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