The US dollar index remained subdued during Asian trading on Monday, hovering near the 99.50 mark. This follows a surprise decline in US retail sales and recent inflation data that signaled a cooling trend, prompting markets to reassess their expectations for Federal Reserve monetary policy. The momentum for a dollar rebound has clearly weakened.
The current market narrative has shifted from whether the Fed will continue tightening to whether a slowing US economy will force a more cautious policy stance. US retail sales fell 0.6% month-on-month in July, contrasting with a 0.2% increase in June, while economists had forecast a 0.1% rise. On an annual basis, retail sales still grew 5.0% in July, but this was a marked deceleration from the revised 6.8% growth seen in June. While a single month's data isn't sufficient to prove that US consumption has entered a sustained contraction phase, the magnitude of the decline exceeded market expectations, enough to trigger a reassessment of the marginal momentum in US consumer spending and economic growth.
The weak consumer data aligns with recent inflation indicators. Both the July CPI and PPI reports showed signs of easing price pressures, further dampening expectations for a near-term Fed rate hike. According to interest rate market data, investors now see only a 31% probability of a rate hike at the Fed's September meeting, while the probability of a move by December sits at around 69%. This implies that the market still leaves room for a possible rate increase within the year, but the timing window for policy action is shifting later.
For the US dollar, this shift means a key support factor – the interest rate advantage – has diminished. The attractiveness of the dollar is largely dependent on the US interest rate differential relative to other major economies. When markets lower their expectations for near-term Fed rate hikes, US Treasury yields and the dollar typically face downward pressure, especially when the policy outlooks of other major central banks, like the European Central Bank and the Bank of Japan, haven't simultaneously turned dovish.
The recent weakening of US economic data has prompted investors to rebuild short positions on the dollar. The dollar staged a temporary rebound following the CPI release, but quickly lost momentum after the PPI data, indicating a lack of sustained buying interest. With the dollar index sliding back below the 100 mark, it's clear that bullish momentum lacks sufficient fundamental catalysts at this stage.
However, the downside for the dollar is not without constraints. Long-term US Treasury yields remain relatively high, which some market participants attribute to concerns about the US fiscal situation and long-term policy credibility. If long-end yields stay elevated, they could provide some support for the dollar through yield differentials and asset allocation effects, even if near-term Fed rate hike expectations decline. Therefore, the dollar's ability to weaken further depends not only on short-term Fed policy expectations but also on a significant decline in US long-term interest rates.
Geopolitical risks are another important variable for the dollar. The situation in the Middle East and the navigation issues in the Strait of Hormuz remain highly uncertain. If energy transport risks escalate further, global risk appetite could deteriorate rapidly, leading to a flight-to-safety flow into the dollar, limiting its downside. Conversely, if these tensions ease, the geopolitical risk premium could fade, potentially removing another source of support for the dollar.
From a global asset allocation perspective, the dollar is facing a complex environment. On one hand, weaker US economic data reduces the necessity for the Fed to continue tightening. On the other hand, elevated long-term US yields and global safe-haven demand prevent a rapid, one-sided decline. Consequently, the dollar index is likely to remain in a weak, range-bound phase, with the next directional move requiring confirmation from new macroeconomic data.
Looking ahead, markets will focus on US employment, inflation, and consumer data. If subsequent figures continue to point to a decline in US economic growth momentum, expectations for a September rate hike could cool further, putting additional pressure on the dollar. Conversely, if the US economy shows renewed resilience and inflation proves sticky, expectations for further tightening within the year could re-emerge, potentially triggering a dollar rebound.
Where to start
On the daily chart, the dollar index is currently trading around 99.50, still constrained by the 100-day moving average, suggesting a short-term bearish bias. The price is also below the mid-Bollinger Band, indicating that sellers are in control. The 14-day RSI stands at approximately 37, which is in the weak zone but hasn't reached extreme oversold levels, implying there is still room for further downside. As long as the price fails to reclaim the key moving average resistance, the technical outlook remains bearish. The first resistance level to watch is the 100-day moving average near 99.75, a crucial hurdle for a bullish reversal. Further resistance lies at the mid-Bollinger Band around 100.35; a decisive break above this level could improve the short-term technical structure. A more significant resistance is the upper Bollinger Band near 101.80. On the downside, initial support is at the lower Bollinger Band around 98.85. A break below this level could open the door for further declines.
On the 4-hour chart, the short-term rebound momentum has clearly faded. With the price back below the 100 mark, sellers have gained a slight edge. If the index continues to be capped by the 99.75 resistance on the 4-hour timeframe and subsequently breaks below 98.85, the bearish trend is likely to persist. However, if the price finds support near 98.85 and manages to break above 99.75, it could trigger a technical rebound, potentially testing the 100.35 level. The key battleground for short-term direction remains the 99.75–100.35 zone.
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The dollar's primary pressure stems from weakening US economic data and declining expectations for Fed rate hikes. The 0.6% month-on-month drop in July retail sales, combined with cooling CPI and PPI data, has pushed the probability of a September rate hike down to around 31%, eroding the dollar's short-term interest rate advantage. Simultaneously, the market is rebuilding short dollar positions, which amplifies the downward pressure. However, elevated long-term US Treasury yields and tensions in the Strait of Hormuz could provide support, preventing the dollar from experiencing a disorderly decline. The 99.75 level is the first key resistance for a short-term dollar rebound, while 98.85 serves as the next important support. A break below 98.85 could accelerate the dollar's weakness, whereas a reclaim of 100.35 would suggest a potential repair of negative market sentiment towards the dollar. The core driver for the dollar's next move will be the tug-of-war between a slowing US economy on one side and safe-haven demand and high long-term yields on the other. The short-term outlook remains bearish, but aggressive short-selling near the key support zone should be avoided, as traders must be wary of a rapid rebound driven by geopolitical risks or changes in US long-term interest rates.
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