Where Next to the USD After a 50bps Cut from FOMC

The US Dollar Index (DXY) has faced significant challenges in regaining upward momentum following the most recent Federal Open Market Committee (FOMC) meeting, as anticipation of additional interest rate cuts continues to dampen sentiment around the greenback. Despite these headwinds, the key support level at 100.50 for the DXY has managed to hold firm, preventing a steeper downturn, at least for the moment. This has kept bearish pressures somewhat at bay, but the overall market tone remains cautious regarding the future trajectory of the US dollar. In contrast, several other major global currencies have seen notable gains against the dollar, benefiting from the evolving monetary policy landscape.

The Euro (EUR), British Pound (GBP), Canadian Dollar (CAD), and Swedish Krona (SEK) have all advanced as market sentiment shifts toward currencies backed by relatively stronger or more stable economic outlooks. The British pound surged to a year-to-date high, buoyed by the Bank of England's (BoE) decision to maintain interest rates at current levels. The BoE's move signalled a more measured approach, indicating that while easing may eventually occur, it is likely to unfold cautiously. This prudent stance has injected fresh confidence into the pound, as investors interpret the BoE's careful approach as a bid to safeguard economic stability.

Turning to Asia, the Japanese yen (JPY) also witnessed some volatility, with the USD/JPY pair climbing to a high of 144.00 before retreating below 143.00. This temporary rally in the US dollar against the yen was short-lived, as broader market dynamics continue to favour other currencies. The Japanese yen’s movements remain closely tied to shifts in global sentiment, and while the yen initially weakened, its recovery underscores the mixed outlook for the US dollar. Meanwhile, the overall economic data coming out of the US remains a mixed bag. The widening current account deficit, which grew to $266.8 billion in the second quarter from $237.6 billion in the first, points to ongoing imbalances in trade and investment flows. However, the US labour market provided a glimmer of optimism, with initial jobless claims falling more than expected to 219,000, indicating continued resilience. Furthermore, continuing jobless claims also decreased, suggesting the labour market is not softening as quickly as some analysts had anticipated.

As global markets shift their focus to upcoming central bank decisions, all eyes are on the Bank of Japan (BoJ) and its policy rate announcement. While most economists expect the BoJ to hold steady on its ultra-loose monetary policy for the time being, there is growing speculation that the central bank may begin laying the groundwork for potential rate hikes soon. Inflation in Japan has edged up to 3% year-on-year in August, marginally higher than July’s reading of 2.8%, but external demand remains weak, posing a significant challenge to Japan's economic outlook. The BoJ is clearly treading cautiously toward policy normalization, balancing the need to support growth while managing inflationary pressures. Investors will be watching closely for any signs that the BoJ might tighten its policy stance, though much will depend on whether inflation trends continue to rise in line with the central bank’s broader goals.

In summary, the outlook for the US dollar remains highly uncertain. With other major currencies, particularly those in Europe and Japan, continuing to demonstrate relative strength, the dollar may face increasing downward pressure in the coming months. The possibility of further US interest rate cuts looms large, potentially exacerbating these pressures. 

Unless there is a notable shift in economic indicators or a more hawkish turn from the Federal Reserve, any short-term recovery in the dollar could be fleeting. Market participants will be closely monitoring upcoming economic releases and central bank actions for any signs of a significant change in direction.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.