Daily Market Recap – DXY Dollar falls to a two-week low

The dollar is under short-term pressure following weak U.S. economic data, a reassuring speech by Jerome Powell on the Fed's upcoming tapering, and a clear resumption of investors' risk appetite.

Recent U.S. data disappointed, raising fears of a sharper than expected slowdown in the world's largest economy. Markit's flash PMIs released last week remained strong, but below expectations. Both manufacturing and service sector activity slowed more sharply than the consensus forecast. The August composite PMI finally came in at 55.4, while the consensus forecast was for a much higher number at 58.3.

Jerome Powell also contributed to the dollar's decline. The Fed Chairman confirmed the start of tapering by the end of the year but reassured that the timing of tapering will not influence the timing of policy rates and that financing conditions will remain attractive.

Finally, the dollar is also experiencing a resurgence in risk appetite among short-term investors. Cyclical currencies such as the euro and the Australian dollar have outperformed safe-haven currencies such as the dollar and the yen for several sessions.

The greenback could rally on renewed risk aversion, economic releases suggesting stronger than expected growth, or hawkish comments from some Fed members. The next releases to watch will be Markit's final PMI indices released on Friday, the ISM indices released on Thursday and Friday, and the monthly non-farm payroll released on Friday.

Since the Fed's monetary policy stance will depend largely on the recovery of the labor market, Friday's NFP report will be the most important macroeconomic release of the week, if not the month of September.

In terms of technical analysis, the short-term momentum of the DXY is bearish. The dollar is back to test first major short-term support at 92.50 points on Tuesday. The market's reaction to this support will be key to the near-term outlook. A pullback below this level would be a bearish short-term signal that would pave the way for a return to key support at 91.70.

 (Chart Source: Tradingview 31.08.2021)

In the medium to long term, the DXY outlook remains bullish above the low at 91.70 points. A pullback below this level would invalidate the bullish reversal signal for the DXY given in mid-August following the top exit from the symmetrical triangle.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.