Dollar Index Receives Boost from Hawkish FOMC. EUR, AUD under pressure.

While not quite a bombshell, the FOMC minutes released on Wednesday, 16^th August, showed that the members of the US Federal Reserve’s Open Market Committee were less unanimous in their desire to pause interest rate hikes than markets initially thought.

The quote that caught the eye was that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy”.

Markets responded quickly, with the probability of another rise in rates before the end of the year jumping to 30%. Most market participants still believe there will be a pause in September, but a November rate rise could be in play.

The news continued to pile pressure on other major currencies vs the USD, with the US Dollar index (DXY) pushing higher.

The EUR continued its months-long slide before holding in a range in early Thursday trading. Following weak Australian employment figures, the AUD was particularly badly hit before recovering on Thursday. The Australian economy created 14.6k jobs in July, compared with forecasts of 15k, well below the 32.6k in June. With the Australian economy beginning to cool, any increase in interest rates is looking less likely.

August is well and truly underway, and the markets are quieter than normal. Traders won’t expect any major surprises between now and September. So, the picture remains the same: The USD remains in pole position against other majors, and the EUR struggles as eurozone economic indicators continue to show a broad weakening across job growth, retail and production.

EUR/USD Technical analysis

Over the past few weeks, robust US data has made it difficult for the EUR/USD to recover to the highs of mid-July 2023. Having tested the 1.0900 psychological support handle and dropped below it, it looks like it will now test the support of the 200-MA (pink) at around the 1.08500 level. The 20 EMA (blue) and 50 EMA (purple) confirm this downward movement, with a crossover of the MAs looking like it’s about to form.

Hovering just above 30, the RSI appears to be moving towards oversold territory, but it still has room to fall before reaching this point and there is no sign that the downward momentum is going to slowdown any time soon. Further lows will wipe out the gains the pair has made since the beginning of the year.

DXY Technical Analysis

According to the DXY, although it has dropped somewhat in the first half of the day, the dollar maintains its multi-week strength, possibly heading towards a new high of 103.60, last seen in June 2023. This relentless upward momentum is further confirmed by a break above the 200-MA on Wednesday and the crossover of the 20 EMA (blue) and 50-EMA (purple) last week. These recent positive moves are propped up by a strong rebound in US yields and speculation about the Fed keeping its restrictive monetary stance longer than initially expected. Extra support for the dollar also comes from the good health of the USD economy.

Further positive moves could see the dollar jump to the 104.62 level last seen in May 2023 and beyond that towards the 105.813 level last seen at the beginning of March 2023.  A downside move could find support at the 102.34 level (50-day SMA – purple) followed by 100.57 (support level from April 2023).