US Dollar Faces Major Level After FOMC, Time for a Reversal?

US DOLLAR PRICE ANALYSIS & NEWS

• Fed Message Remains the Same
• Historically Weak US GDP, But Greater Focus is on Path of Recovery
• Fed Strategy Review Increases Importance of Jackson Hole Symposium
• US Dollar Shorts is a Crowded Trade, Time for a Reversal?

FED MESSAGE REMAINS THE SAME

In line with market expectations, the FOMC provided little in the way of new information at the July meeting. Fed Chair Powell reiterated the central banks pledge to maintain ultra-loose monetary conditions. In light of the uptick of COVID cases in the US since the last Fed meeting, the central bank highlighted that “the path of the economy will depend significantly on the course of the virus” and by extension monetary policy. Alongside this, one important admission from Fed Chair Powell had been that “high-frequency data showed that the pace of the recovery had slowed since mid-June”, suggesting that the Fed is beginning to see risks that the economy may have stalled. In turn, it is the pace of the recovery that will guide future monetary policy decisions, not that of backward-looking data showcases how deep the contraction in activity had been.

HISTORICALLY WEAK US GDP, BUT GREATER FOCUS IS ON PATH OF RECOVERY

That said, this ties into today’s economic calendar, in which market participants can get a first look at the US Q2 GDP with consensus looking for a contraction of 34%. Although, with a high/low range of -22.6% to -40%, the probability is high for a large deviation away from consensus. However, as markets have largely priced in the expected historically weak Q2 growth figures, more focus will be placed on the path of the recovery. As such, initial jobless claims may garner greater attention, particularly after last week showed the first increase in jobless claims since March.

US INITIAL JOBLESS CLAIMS PICKING UP AGAIN

Source: Refinitiv

FED STRATEGY REVIEW INCREASES IMPORTANCE OF JACKSON HOLE SYMPOSIUM

At the press conference, Chair Powell did not have any fresh updates on the monetary policy framework review, only adding that the review would be concluded in the near future. In turn, we feel this will increase the importance of the Jackson Hole symposium (Aug 27-28) for Powell and Co. to possibly set the foundation for changes in forward guidance ahead of the September 16th meeting.

US DOLLAR SHORTS IS A CROWDED TRADE, TIME FOR A REVERSAL?

The sell-off in the US Dollar has been relentless in recent weeks and understandably so. US real yields have plummeted, US fiscal concerns remain in the short term, while COVID cases have continued to increase. However, with Europe beginning to show signs of a second wave of COVID and with the US Dollar short trade appearing to look crowded a wobble in risk assets may be enough to bring to life in the US Dollar. At the same time, on the technical front, the greenback has tested key trendline resistance while the daily RSI is heavily oversold, raising the potential for a reversal.

US DOLLAR PRICE CHART: WEEKLY TIME FRAME

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