Forex Today: US Dollar Struggles to Regain Support After Last Week’s Selloff
On Monday, August 26, the US Dollar (USD) holds steady against its major counterparts, attempting to recover from the substantial losses it incurred last week. Market participants are keenly watching for key economic data releases, including the IFO sentiment data from Germany, as well as Durable Goods Orders for July and the Dallas Fed Manufacturing Business Index for August from the United States, which are expected later in the day.
USD Under Pressure After Powell’s Dovish Remarks
The USD faced significant selling pressure on Friday following a dovish speech by Federal Reserve (Fed) Chairman Jerome Powell at the annual Jackson Hole Economic Symposium. Powell emphasized the need for an adjustment in monetary policy, signaling a potential shift in the Fed’s approach. “We will do everything we can to support a strong labor market as we make further progress toward price stability,” Powell remarked, suggesting that the Fed might be preparing for a less aggressive stance in the near future.
In response to Powell’s comments, the USD Index dropped 0.8% on Friday, contributing to a 1.7% loss for the week. The benchmark 10-year US Treasury bond yield also fell nearly 1.5%, reflecting market expectations of a more accommodative monetary policy. Early Monday, the 10-year yield remained in negative territory, trading below 3.8%, while the USD Index hovered around 100.70, fluctuating within a tight range.
Geopolitical Tensions Add to Market Uncertainty
Adding to the market’s cautious tone, geopolitical tensions flared over the weekend as Reuters reported that Hezbollah launched hundreds of rockets and drones at Israel on Sunday. In response, Israel’s military conducted pre-emptive strikes across southern Lebanon to thwart what it described as a large-scale attack by Hezbollah. This escalation of violence has contributed to a risk-off sentiment in the market, with US stock index futures trading marginally lower in the European morning on Monday.
EUR/USD and GBP/USD Show Strength Amid USD Weakness
The EUR/USD pair gained bullish momentum ahead of the weekend, reaching its highest level in over a year at 1.1200. The pair is now in a consolidation phase, trading at around 1.1180 early Monday. The Euro’s strength has been bolstered by positive economic data and a weakening US Dollar, although traders remain cautious ahead of the release of Germany’s IFO sentiment data, which could influence the pair’s direction.
Similarly, the GBP/USD pair extended its rally on Friday, rising above 1.3200 for the first time since March 2022. The British Pound has benefited from the broader weakness of the USD and optimism surrounding the UK’s economic outlook. However, the pair has retreated slightly in the European morning, trading just below 1.3200 as traders take profits and reassess the market’s direction in light of upcoming US economic data.
USD/JPY Continues to Decline
The USD/JPY pair remains under bearish pressure at the start of the week, following a more than 1% decline on Friday. The pair is trading deep in the red, below 144.00, reflecting the ongoing strength of the Japanese Yen. Earlier in the day, data from Japan showed that the Leading Economic Index edged higher to 109.0 in June from 108.6 in May, indicating a slight improvement in Japan’s economic outlook. This positive data has further supported the Yen, contributing to the USD/JPY pair’s continued decline.
Gold Surges Amid Market Uncertainty
In the commodities market, Gold surged higher on Friday, closing the week above $2,500 per ounce. The precious metal has continued its upward trajectory in the European morning, closing in on $2,520. Gold’s rally has been driven by a combination of factors, including the weakening USD, lower US Treasury yields, and heightened geopolitical tensions, which have increased demand for safe-haven assets.
Looking Ahead
As the week progresses, market participants will closely monitor several key economic data releases that could impact the USD’s direction. The IFO sentiment data from Germany will provide insights into the health of the Eurozone’s largest economy, while US Durable Goods Orders and the Dallas Fed Manufacturing Business Index will offer clues about the strength of the US economy.
The USD’s ability to regain support will largely depend on the outcomes of these data releases, as well as any further commentary from Fed officials that could provide additional clarity on the central bank’s policy direction. In the meantime, the USD is likely to remain under pressure, with traders exercising caution in the face of ongoing geopolitical risks and economic uncertainty.
