This week, the foreign exchange market has been significantly influenced by the expectation of a rate cut by the Federal Reserve. The Fed is widely expected to cut rates by 25 basis points at its September meeting. The Chicago Mercantile Exchange's Fed-Watch tool shows a 100 percent chance of a rate cut. That expectation has prompted investors to adjust their portfolios, boosting the dollar. Although the dollar index (DXY) has fluctuated this week, it has generally maintained a relatively strong position.
A slew of U.S. economic data this week has been mixed. S&p Global's services and composite PMI for July came in at 56 and 55, respectively, both beating expectations, while the manufacturing PMI fell to 49.5 from 51.6, below expectations of 51.7. The U.S. goods trade account for June is estimated at -$96 billion, an improvement from -$99.4 billion the previous month but still below market expectations of -$98 billion.
U.S. gross domestic product, meanwhile, is expected to grow 1.9 percent quarter-on-quarter, up from 1.4 percent in the first quarter. The data suggest an acceleration in US economic growth. In addition, the core personal consumption expenditures (PCE), which the Fed watches, is expected to decline from 2.6% to 2.5% year-on-year. The data reflect the resilience of the U.S. economy in some areas but also point to weakness in manufacturing and easing inflationary pressures.
Global risk factors and geopolitical events have also had an important impact on the forex market. The US-China trade war, the Russia-Ukraine war, and the ongoing conflict in the Middle East have added to market uncertainty and prompted investors to seek safe haven assets. That sentiment has driven demand for safe-haven assets such as gold, which has held above $2,400 this week.
Euro/dollar (EUR/USD) rebounded after the release of the mixed PMI report in the US, despite the weak preliminary PMI data in the eurozone. The US composite PMI rose to 55.0 from 54.8, while the services PMI unexpectedly rose to 56.0, while the manufacturing PMI fell to 49.5, indicating a contraction in manufacturing activity. At the same time, rising market expectations of former President Donald Trump's victory in the upcoming presidential election have added to market uncertainty and further boosted risk aversion.
The dollar index (DXY) retreated from this week's high of 104.50 as demand for the greenback weakened amid concerns over Trump's possible comeback. In addition, the market is closely watching the upcoming release of the US core personal consumption expenditures (PCE) inflation data for June, which will provide fresh guidance for the Fed's interest rate decision. The market expects core PCE inflation to fall to 2.5 percent from 2.6 percent in May, which would further reinforce expectations for a rate cut at the Fed's September meeting.
From a technical point of view, EUR/USD moved within a symmetrical triangle shape and failed to break out of this shape before falling back. The pair is currently trading below the 20-day exponential Moving Average (EMA) of …, showing the possibility of a further decline. The 14-day Relative Strength Index (RSI) is back in the 40.00-60.00 range, indicating that bullish momentum has weakened. On the downside, the integer support of … and …will be key support levels. If these support levels are broken, EUR/USD could dip further to lower levels. On the upside, the integer resistance of … will be the key barrier that bulls need to break through.
AUD/USD extended its decline to 0.6580. The main reasons are rising concerns about the health of the Chinese economy and falling commodity prices, especially iron ore. In addition, Australia's Judo bank PMI data showed weakness in the economy, further weighing on the performance of the Australian dollar. Still, the Reserve Bank of Australia's (RBA) delay in cutting interest rates due to high inflation could limit further weakness in the Australian dollar.
From a technical perspective, the Aussie/USD broke below the 20-day and 100-day Simple Moving averages (SMA), indicating that the downtrend may be more than just a correction. However, as long as the pair remains above the 200-day SMA, a downgrade can still be considered a "correction." A break below this level could trigger a sell signal. The AUD/USD range to be monitored is … to …, and buyers must remain in this zone to prevent further losses.
