Dollar Bounces Back As Traders Eye Federal Reserve’s Next Move

What’s going on here?

The dollar made a surprising comeback from a 13-month low against the euro ahead of Federal Reserve Chair Jerome Powell’s much-anticipated speech.

What does this mean?

The dollar’s recent dip stemmed from doubts about the US economy’s strength and potential interest rate cuts by the Federal Reserve. Mixed economic signals like weaker-than-expected July job gains and a rising unemployment rate have fueled rate cut speculation. Jefferies’ Brad Bechtel thinks the dollar was oversold, finding support after July’s payroll report shook up currency markets. Traders are also unwinding carry trades, adding to the rate cut buzz. Powell’s speech at the Jackson Hole symposium in Wyoming is highly anticipated for clues on future rate decisions, though key August jobs and inflation data might leave some questions unanswered.

Why should I care?

For markets: Dollar dance continues.

Traders see a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut in September, according to CME Group’s FedWatch Tool. Despite weak growth in Europe and the UK, analysts suggest the dollar’s recent dip against the euro and pound might be overdone since other central banks could mirror the Fed’s easing actions. The dollar index rose to 101.50, showing strength amid volatile trading. The euro fell to $1.111, sterling stayed at $1.3093, and the dollar rose 0.65% against the yen, hitting 146.2 yen.

The bigger picture: Reading the Fed’s tea leaves.

Powell’s Jackson Hole speech is pivotal, but with key August jobs and inflation data pending, he might keep some insights in reserve. The Fed’s July meeting minutes hinted at a likely rate cut next month, supported by regional Fed presidents like Patrick Harker and Susan Collins. Rising unemployment claims indicate the labor market is cooling off, and revised employment data shows past job growth was overestimated. Across the Atlantic, similar easing measures from the European Central Bank and Bank of England are expected, adding complexity to the global economic landscape.