Last week currency recap: US dollar surges after lower than expected inflation (DXY)

The U.S. Dollar Index (DXY) experienced notable movement during the week of August 26 to August 30, 2024; it gained 1.02% last week and touched $101.68 on Monday, September 2, after economic indicators painted a picture of relative strength in the U.S. economy.

The Federal Reserve’s preferred inflation gauge, the Core PCE Price Index, increased 2.6% Y/Y in July, less than the 2.7% expected. The inflation data shows that the pressure remains subdued as the Fed approaches its next monetary policy meeting.

The probability of a 25-basis point rate cut increased to 69.5% from 65.0% a day earlier, while the probability of a 50-bp cut dropped to 30.5% from 34.0%, according to the CME FedWatch tool.

Another important economic gauge, the U.S. GDP, was revised upward to an annual rate of 3% from an earlier reading of +2.8%.

To add to that, Fitch Ratings also affirmed the United States' long-term foreign currency issuer default rating at AA+ with a stable outlook last week, which led to further strengthening of the dollar.

Last week currency movements: (Aug 26 to Aug 30)

Euro (EUR:USD) -1.22%, with the annual inflation rate in the Eurozone down to 2.2% in August from 2.6% in the earlier month.

Pound Sterling (GBP:USD) -0.58%. Sterling appreciated to $1.326 last week, its best level since March 2022. Sterling capped August with a 2.1% gain amid an expected rate cut by the U.S. in September, while a cautious approach to further rate cuts by the Bank of England.

Japanese Yen (USD:JPY) +1.52%

Chinese Yuan (CNY:USD) +0.38%

Swiss Franc (CHF:USD) -0.27%

Australian Dollar (AUD:USD) -0.21%

Canadian Dollar (CAD:USD) +0.11%

BofA Global Research FX weekly notes suggested, “We are bearish USD for 2H 2024, looking for EUR-USD at 1.12 by end-2024, above consensus’ 1.10.” Their bearish outlook is based on slower US growth, supportive risk sentiment on Fed rate cuts, valuation, and positioning, the report showed.

BofA's Chief Technical Strategist wrote, “The decline in the DXY is testing support at the 200wk SMA (100.33), is oversold and received a systematic buy signal from the TD Sequential indicator that implies a 1-4 week reversal is possible.”

During the week, the 10-year yield (US10Y) increased by about 12 basis points to 3.91% and the 2-year-yield (US2Y) inched 2 points higher to 3.92% on Friday.

Looking ahead to this week: Investors will closely monitor updates on Wednesday’s Jolts job openings report; ADP data on private sector hiring will be released on Thursday; and the health of the labor market can be checked on Friday’s non-farm payrolls and employment rate.

Meanwhile, the Bank of Canada is set to announce a rate change, and China is to release more manufacturing data, among other economic events such as the Swiss CPI and EA retail sales.

Dollar-Based ETFs: (UUP), (USDU), and (UDN).