Dollar Rebounds As U.S. Data Dims Scope For Big Fed Cut

The enthusiasm generated by Fed Chair Jerome Powell’s dovish hints at the Jackson Hole Symposium abated in the past week as economic data from the U.S. revealed a robust economy and easing price pressures.

Better-than-expected GDP data and mostly in-line PCE readings catalyzed the Dollar’s resurgence during the week ended August 30. The U.S. dollar gained against the euro, the British pound, the Australian dollar as well as the Japanese yen. The Dollar Index, which measures the U.S. dollar’s strength against a basket of 6 currencies also surged during the week.

The Dollar Index or DXY rallied 1.04 percent during the week ended August 30. The Index which was at 100.68 on August 23 in the backdrop of Fed Chair Jerome Powell’s dovish Jackson Hole speech rebounded to close the week at 101.73. The week’s trading range was slightly wider, with a one-year low of 100.51 recorded on Tuesday and a high of 101.78 recorded on Friday.

A stronger-than-expected GDP update from the U.S. on Thursday subdued Fed rate cut expectations. Data released by the U.S. Bureau of Economic Analysis on Thursday showed the real gross domestic product growing at an annual rate of 3 percent in the second quarter of 2024, versus 2.8 percent in the initial estimate and 1.4 percent in the first quarter. The robust growth obviated market concerns about restrictive monetary policy curtailing economic growth in the world’s largest economy.

Meanwhile, initial jobless claims data released by the U.S. Department of Labor on Thursday morning revealed no major surprises. The number of people claiming unemployment benefits stood at 231 thousand for the week ended August 24 versus the revised reading of 233 thousand a week earlier and market expectations of 232 thousand.

Data for July released by the U.S. Bureau of Economic Analysis on Friday showed the year-on-year PCE Price Index steady at 2.5 percent, belying expectations of a rise to 2.6 percent. The core component which was seen rising to 2.7 percent was surprisingly steady at 2.6 percent. As expected, the month-on-month PCE Price Index edged up to 0.2 whereas its core component remained steady at 0.2 percent.

Simmering geopolitical tensions in the Middle East, the trade tensions between China and the West as well as the month-end demand also contributed to the resurgence in the Dollar.

The reduced likelihood of a massive rate cut to prop up the economy was also reflected in the CME FedWatch tool that tracks the expectations of interest rate traders. The probability of a rate cut of 50 basis points by the Fed rate in the review scheduled for mid-September dropped to 30 percent on August 30 from 36 percent on August 23. Likewise, expectations of a 25-basis points rate cut increased to 70 percent from 64 percent a week earlier.

The EUR/USD pair plunged 1.28 percent during the week ended August 30 amidst the Dollar’s resurgence, easing inflationary pressures in the Euro Area as well as hints of a growing apprehension within the European Central Bank about falling behind the monetary easing curve. The pair slipped to 1.1047 from 1.1190 a week earlier even as recent comments from ECB officials portended an unease with restrictive monetary policy stifling economic growth. The weekly trading ranged between the high of 1.1202 recorded on Monday and the low of 1.1044 touched on Friday amidst data showing inflation in the region declining on expected lines.

The greenback’s rebound triggered by a softening in the expectations of a Fed rate cut caused the sterling also to shed 0.63 percent during the week ended August 30. The GBP/USD pair declined to 1.3126 on August 30, from 1.3209 a week earlier. The sterling’s weekly trading range was between the 2-year high of $1.3268 recorded on Tuesday and $1.3108 recorded on Friday. The not-so-dovish comments by Bank of England Governor Andrew Bailey at the Jackson Hole symposium provided support to the pound.

The Aussie also could not withstand the Dollar’s rebound driven by a reassessment of the Fed’s monetary policy outlook. The AUD/ USD pair shed 0.41 percent during the week spanning August 26 to 30. From the level of 0.6792 recorded on August 23, the AUD/USD pair dropped to 0.6764 in a week’s time. The pair touched a high of 0.6825 on Thursday in the aftermath of the CPI update and a low of 0.6751 on Friday. Data released on Wednesday by the Australian Bureau of Statistics had revealed a less-than-expected decline in the monthly consumer price indicator.

The Dollar’s rebound eclipsed the Japanese Yen’s strength predominantly attributed to Bank of Japan’s firm resolve to hike rates. The USD/ JPY pair rallied 1.24 percent during the week ended August 30 as it closed at 146.16 versus 144.37 a week earlier. The pair ranged between the low of 143.45 on Monday and the high of 146.26 on Friday even as Japan’s monetary policy divergence with the rest of the world and the potential volatility threatened to jeopardize Bank of Japan’s plans to combat inflation with restrictive monetary policy.

Currency market sentiment remains overwhelmed by anxiety ahead of the week’s economic data deluge as well as the looming interest rate decisions by major central banks. Ahead of release of PMI readings, job openings and non-farm payrolls, the Dollar Index has rallied to 101.85.

With the ECB on track to deliver another rate cut in September, the EUR/USD pair has slipped to 1.1039 whereas the GBP/USD pair has decreased to 1.3119. The AUD/USD pair has also declined to touch 0.6732 amidst anticipation about the GDP update on Wednesday. Amidst the yen’s strength, the USD/JPY pair has decreased to 146.02.

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