Dollar at seven-month low on rate cut bets

On Tuesday, the dollar hovered close to a seven-month low as traders bet on potential interest rate cuts by the U.S. central bank starting next month. Investors are also awaiting comments from Federal Reserve Chair Jerome Powell, scheduled for Friday. This dollar weakness propelled the euro to its highest level of the year, while the British pound neared a one-month peak. Additionally, the emerging markets currency index reached a record high.

Dollar hits 7-month low

The dollar dropped to a seven-month low, while the Japanese yen reached a more than one-week high, as traders anticipated comments from Federal Reserve Chair Jerome Powell later this week. Many expect Powell to signal that the U.S. central bank might begin cutting interest rates in September.

A key aspect of Powell’s speech at Jackson Hole on Friday will be whether he hints at a 25 or 50 basis point rate cut. The likelihood of a larger cut has decreased since recent data revealed unexpectedly high shelter inflation for July and a strong retail sales report for the same month.

Another important point will be whether Powell suggests that rate cuts could become a regular occurrence at future meetings. However, markets might be overestimating the extent and speed of the Fed’s potential actions.

“I think we’re still at the point of the justification to cut in September,” said Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey.

“On a relative basis it would be kind of over the top to be one of the last central banks to start their cutting cycle, but then also to start cutting immediately and cut 50 basis points and then cut every meeting after that.”

USD/JPY drops from key resistance

Over the past month, USD/JPY has experienced significant volatility, dropping 20 big figures in three weeks following the Bank of Japan's second rate hike of the year. The pair then surged nearly 10 big figures due to a boost in US dollar strength, only to decline again last Friday and today amid a weaker US dollar. The next resistance for USD/JPY is expected between 151.45, where the 200-day SMA is positioned, and a previous resistance level now acting as support, just below 152.00. If the sell-off continues, the focus may shift to the 140.28 level.

On Tuesday during Asian trading hours, the USD/JPY pair continued its decline for the third straight day, trading around 146.05. This downward movement is attributed to the overall weakness of the US Dollar (USD). Traders are watching closely for Japan’s National Consumer Price Index (CPI) for July and will also be attentive to Federal Reserve Chair Jerome Powell’s speech on Friday.

EUR/USD sets new 2024 high

The dollar fell broadly versus the majors on Monday on the back of growing expectations that Fed Chair Jerome Powell would use this week's Jackson Hole symposium to signal the potential for an interest rate cut next month.

Last week, EUR/USD experienced a potentially major breakout from a long-term consolidation pattern. After a year of forming lower highs and higher lows, the world's most traded currency pair broke out of its broad symmetrical triangle and surpassed the psychological resistance at 1.10.

Given the extended period of consolidation, this bullish breakout could have more momentum to continue. Key resistance levels to watch on the upside are 1.1150 (the highs from July and December 2023) and the upper-1.1200s (the 2.5-year highs reached last July). A return below 1.10 would cast doubt on the current bullish outlook.

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