Currency Analyst since 2010

USD: outlook for August 17-23

By Elizabeth Belugina

During the past week US dollar showed moderate gains versus other major currencies.

On the one hand, the market sees higher and higher possibility of the Federal Reserve’s rate hike in September. Solid retail sales data also supported the case for an early rate hike.

On the other hand, traders are still far from sure of such outcome. According to the latest Reuters polls of the leading economists, the odds of September rate hike rose to 60%. Although this is much more than we have seen before, uncertainty remains. In addition, the greenback has already strengthened much and many large players take profit on their bullish USD positions on good data releases. China’s yuan devaluation also limited strength of American currency: after initially higher demand for USD, traders feared that this would prevent the Fed from tightening monetary policy, as American central bank would not want to lose the currency war and let the greenback strengthen much more.

Next week will be full of important economic releases and events. Pay attention to inflation figures on Wednesday – low inflation makes it harder for the Federal Reserve to start raising interest rates. In addition, the Fed’s July meeting minutes will see light. The market will be looking at the division of opinions within the regulator and information on how the policymakers estimate the external risks to American economy. San Francisco Fed President Williams will speak on Thursday: he is one of the FOMC members leaning to a rate hike in September. Also on Thursday is the first day of the Jackson Hole symposium. This is an annual event, attended by central bankers, finance ministers, academics, and financial market participants from all over the world and hosted by the Federal Reserve. We can expect plenty of important comments on economic and monetary policy not only by the Fed, but also by other central banks. Global trends such as decline in commodity prices will also be discussed.     

Traders will surely follow all these developments with great attention. For us to see confident growth in USD we need good American statistics accompanied by the hawkish comments of the Federal Reserve. And even this may be not enough: at the point when the market already has significant long USD positions, new bullish impulse should come from other nations and other central banks to provide monetary stimulus to their economies. Where the market will see that or at least the possibility of that, USD will gain. In this sense, commodity currencies should be the weakest versus the greenback.  

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