DXY is losing ground – London Business News | Londonlovesbusiness.com

The DXY has been steadily losing ground, posting its third straight week of declines and is now dipping below the 102 level.

Given that we haven’t observed a clear positive correlation between narrowing interest rate differentials and the decline in the DXY, I believe this reflects traders’ increased appetite for risk assets like US equities.

Last week, July’s US CPI continued to show cooling inflation, reinforcing the expectation that the Fed will cut rates in September.

Meanwhile, stronger retail sales data acted like a cushion, softening fears of a hard landing for the US economy. In my view, the mix of a “non-urgent” rate cut, reduced market volatility, and the strong performance of US equities has substantially boosted risk appetite, which in turn has weakened the dollar’s bullish momentum, giving cyclical currencies like the AUD, NOK, and CAD room to shine.

Meanwhile, there has been robust buying interest in EUR/USD since the start of August, with the pair rising by 58bp yesterday. While USD/JPY has moved in the opposite direction, with sellers aggressively testing the support level at 146.56. I believe the strong buying interest in EUR and JPY also contributes to the selling pressure on the DXY.

This week, all eyes will be on Powell’s speech at the Jackson Hole Symposium. In my view, if Powell sticks to the script and signals a 25bp rate cut in September, the dollar index is likely to drift around the 102 level. That said, I think there’s a small chance that if Powell hints at a more aggressive 50bp cut and economic data from China and Europe continue to improve, the DXY could test the 100 mark due to panic selling.