Source: Reuters

Summary: The Dollar's value dipped slightly on 2 September after hitting consistent highs for two weeks. Rising Treasury yields and economic data supported the Dollar's recent strength. 

However, analysts expect the Dollar to weaken in the second half of the year, and the Euro is predicted to rise. Investors are focused on the upcoming US jobs report, influencing the Federal Reserve's rate cut decision.

Key points

  • The Dollar index weakened by 0.08% to 101.67 in the first week of September. This slight decline came after reaching its highest level in almost two weeks

  • The European Central Bank's rate cut expectations have decreased due to persistent inflation and a lack of clear signals from policymakers

  • The rise of the far-right AfD in Germany and potential political stalemates in Europe could hinder economic growth and integration efforts

  • The Euro strengthened against the Dollar despite political uncertainty and persistent inflation

Market impact 

Market expectation of rate cuts

Despite the positive economic indicators, market expectations for Federal Reserve rate cuts have increased due to concerns about potential job losses. First, the expected rate cut was around 25 bps but has now increased to 50 bps after the US jobs report. The Federal Reserve has indicated a willingness to prioritize job stability, and investors are anticipating that the central bank will take steps to mitigate the risk of a recession.

Dollar strengthens amid rising treasury yields

The US Dollar strengthened, reaching its highest level since August 20, as rising long-term Treasury yields and stronger-than-expected economic data suggested a less aggressive Federal Reserve rate cut. Traders are now less likely to see a larger rate cut this month, with a 33% chance of a 50-basis-point reduction compared to 36% a week ago. However, a quarter-point cut is still fully priced in. However, a quarter-point cut is still fully priced in.

Euro’s appreciation against the USD

The Euro's strength against the USD is attributed to the European Central Bank's expected rate cuts and the resilience of the European economy despite inflationary pressures. While inflation has been a concern in Europe, the ECB has indicated its intention to raise interest rates gradually to combat inflation without causing significant economic disruption.

Potential for USD weakening in the near future 

While the Dollar has shown strength recently, analysts predict a potential weakening in the year's second half. The Dollar's attractiveness may diminish as the US economy slows down relative to other major economies. The Euro is expected to appreciate further, reaching a target of $1.12, as the US economy slows down relative to Europe. This suggests that investors anticipate a shift in economic momentum and are positioning themselves accordingly.

What experts have to say about the USD retracing 

Athanasios Vamvakidis, global head of forex strategy at Bank of America, mentioned, "the US economy is slowing but is still doing much better than the rest of the world." His statement suggests that the US economy remains relatively robust despite experiencing a slowdown compared to other global economies. 

Vamvakidis continued his statement by saying, “With figures at or below 100,000, we will see risks of a hard landing and the market pricing in a higher chance of a 50 bps rate cut”. If the number of jobs created falls below 100,000, it could signal a significant economic slowdown, potentially leading to a recession. Investors anticipate a more dovish monetary policy stance, which could weaken the USD.

Additionally, Christian Schulz, deputy chief European economist at Citi, added, “the only clear lesson is that the far-right AfD continues to resist the temptation of power until they get an outright majority".

Future outlook: 

1. US jobs report: The upcoming US jobs report will be crucial to the Federal Reserve's rate cut. A strong report could support the USD, while a weak report might lead to a more aggressive rate cut, potentially weakening the Dollar.

2. European political developments: The rise of the far-right AfD party in Germany and potential political stalemates in Europe could introduce uncertainty into the region's economy. This could affect the Euro and, indirectly, the USD due to the Eurozone's interconnectedness with the global economy.

3. Global economic conditions: The relative strength of the US economy compared to other global economies will continue to influence the USD's value. If the US economy continues to outperform, it could support the Dollar. However, if global economic conditions deteriorate, the USD might face pressure.

Insights for traders

  • Short-term trading opportunities: Traders might consider short-term trading strategies based on economic data releases and market reactions. For example, traders might anticipate a short-term sell-off in the USD if the US jobs report comes in weaker than expected

  • Option strategies: Options contracts can be used to hedge against potential losses or to speculate on future price movements of the USD. For instance, a trader could long a put option on the USD to protect against a potential decline in its value

  • Currency pairs: Traders might focus on currency pairs highly correlated with the USD, such as EUR/USD or GBP/USD. Understanding these relationships can help identify potential trading opportunities

Insights for investors

  • Long-term portfolio allocation: Investors might consider allocating a portion of their portfolios to USD-denominated assets, such as US treasury bonds or stocks. This can provide diversification advantages and potentially protect against currency risk

  • Currency hedging: For investors who hold foreign assets, currency hedging strategies can be used to mitigate the impact of fluctuations in exchange rates. This involves taking positions in the foreign currency market to offset potential losses

  • Economic forecasting: Investors might benefit from following economic forecasts and analyses from reputable sources to make informed decisions about their currency investments. This could involve subscribing to economic newsletters or consulting with financial advisors

Conclusion 

The USD remained stable despite a slight decline, influenced by the upcoming US jobs report. Rising treasury yields and stronger economic data supported the Dollar's strength, suggesting a less aggressive rate cut from the Federal Reserve. However, the USD is expected to weaken in the second half of the year as the US economy slows down and geopolitical uncertainties in Europe impact the Euro, so traders can enter positions accordingly.

Disclaimer: All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.

Forecasts and predictions about future performance are inherently uncertain and speculative in nature. While every effort has been made to provide accurate and reliable information, there is no guarantee that the events or outcomes discussed will occur as forecasted. Past performance is not indicative of future results.