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Dollar Index Remains Firm in the Wake of a Dovish Fed

By OFX

The US Dollar Currency Index (DXY) opens lower this morning at 95.25, after retreating half a percent. The impetus for the decline was an eventful week for the President with disparaging comments about the Federal Reserve driving the declines. Mid-level trade talks with Chinese counterparts also concluded last week with reports that nothing new is being added to the dialogue. Overall, US counterparts relished the softening USD with most currencies appreciating against it.

President Trump continues to be the catalyst for markets involving the Dollar. His comments regarding US monetary policy were sharply counter to the rhetoric from the independent Federal Reserve. The disconnect led to a broad sell-off in the USD, despite the fiercely independent nature of the Fed. Fed Chair Powell added to the conversation later in the week with his introductory statement at Jackson-Hole. While the market interpreted his statement as mostly dovish in tone, he did reiterate his view that a gradual increase in Interest Rates was the best policy. Despite the confirmation from Powell’s speech, the market ultimately was skittish and continued its negative bias.

The market also kept a close eye on on-going mid-level trade talks with China that ultimately added little to the dialogue. Tensions remain high between the two largest economies with market concerns of an escalating Trade War increasing, although there was little impact on markets. To start the week, the Greenback enjoys a mostly quiet economic calendar.

The Canadian Dollar is higher this morning when valued against the US Dollar. The CAD rebounded off a one week low of 1.3100 on Friday following an increase in risk appetite and sold off on the greenback following Federal Reserve Chairman Jerome Powell Jackson hole comments that inflation remains subdued below the target rate of 2%.

Bank of Canada’s Governor Stephen Poloz used his speech at the annual Jackson Hole Symposium to calm market participants by saying that he is not worried about inflation levels climbing above its target range whereby it hit seven-year highs in July of 3% on a year-on-year basis.

The remarks did not stop investors buying the loonie as it gapped on opening to 1.3004 this morning as it is widely expected that the Bank of Canada will increase interest rates in September and is currently priced in at a 90% chance. The USD/CAD currently trades this morning at 1.3050.

The Euro moved 1.6% higher against the U.S Dollar last week being one of the top performers out of the G10 currencies. The pair moved from lows 1.1437 and closed the week at 1.1619 – a 2-week high. The primary driver behind the Euro’s strength has been broad US dollar weakness following Trump's criticism last week on the Federal Reserve’s Chairman’s decision over its higher rates policy. Trump is after a lower greenback and believes the dollar is getting far too expensive.

On the data front, the preliminary August Markit PMI for the EU indicated that the economy continued to grow, edging higher from 54.3 in July to 54.4 in August. Consumer confidence fell to -1.9 in August, from -0.5 in July. It was the fourth consecutive monthly decline, taking consumer confidence to its lowest in 15 months.

The economic calendar is quite busy this week with German and EU CPI the most notable. Today we had German Ifo Business Climate change which is based on surveyed manufacturers, builders, wholesalers, services, and retailers. German Ifo survey released higher than the previous 101.7 and forecasts of 102.5 and posted an expansion number of 103.8. The recent momentum in Germany’s Ifo survey suggests further upside to Germany and by extension Euro-area growth momentum during the remainder of the quarter. Market participants are starting to question if the current upside trend will continue, if one starts to factor in trade tensions and Brexit.

The Great British Pound enjoyed mixed fortunes through trade on Friday edging higher against the USD while diving to 11-month lows against the Euro. Broader USD weakness helped Sterling push back through 1.2850 as market participants tempered bets surrounding ongoing and sustained monetary policy tightening following Fed Chair Jerome Powell’s dovish Jackson Hole address.

Gains were muted, and the Pound dropped sharply against the Euro as fears a “No-Deal” Brexit loom ever more significant. While UK ministers expect to meet an October deadline EU leaders optimism is ominously absent, suggesting an emergency summit will be needed in November if an exit agreement is to be reached. Pushing toward 0.9050 the Euro appears poised to extend gains as Brexit uncertainty continues to weigh on broader GBP direction.

With little macroeconomic data on hand, today or through the week ahead attentions remain affixed to Brexit developments.

The Australian Dollar traded within a wide range this past week plunging on Friday to a weekly low of 0.7237 as Prime Minister Malcolm Turnbull suffered a leadership contest which ended with him stepping down and Scott Morrison becoming the new Prime Minister. The Aussie later recovered following Scott Morrison’s victory, settling around 0.7330.

On the data front, this week and the economic calendar is relatively quiet to close out the month of August. On Wednesday will see the release of Housing Industry Association (HIA) New Home Sales data for July. On Thursday the Australian Bureau of Statistics will release private sector capex data for the June quarter which is expected to rise 0.9%, leaving annual growth at 3.5%. On Thursday there’s also data on July building approvals.

From a technical perspective, the AUD/USD pair is currently trading at 0.7316. We continue to expect support to hold on moves approaching 0.7300 while now any upward push will likely meet resistance around 0.7355.

The New Zealand dollar strengthened into the weekly close supported across various indicators and edging back toward 0.67. The Kiwi consolidated its recovery from mid-week lows below 0.6550 after the PBOC announced it would re-introduce measures to dampen currency volatility, protecting the CNY from a more profound correction and move through 7.0 and prompting an immediate one percent appreciation. The Kiwi followed suit with further support stemming from dovish Fed commentary and an uptick in commodity prices.

With little of note on the domestic docket to start the week attentions turn to Wednesday’s business confidence report for macroeconomic direction. Further depreciation in business confidence could damage broader output and only dampening RBNZ appetite to tighten monetary policy. We expect resistance on moves approaching 0.67 and 0.68 with buying