The dollar index rebounded during the Asian session today to reclaim a new level above 108.5 after the previous retracement that decreased the price to 107.97 yesterday.
The expectation of a reduction in the Core Personal Consumer Expenditure, which will cause the Fed to hike the interest rate in September further, has been an important factor driving this pair up again.
Economists are currently predicting that with the reduction seen in US durable goods orders on Wednesday, which fell to 0.0% MoM against the previous record of 2.0%, the Core PCE would therefore be expected to follow the same trend and diminish significantly, pointing to rising inflation again in the US economy after the initial decline recorded in July.
They hoped this prediction would force the Fed to stick to another aggressive interest rate hike for the US dollar during their next session in September.
The Core PCE is a critical economic data point that measures the change in the prices of goods and services purchased by consumers but excludes food and energy prices.
The fact that this data excludes the prices of food and energy in measuring the difference in the price of goods and services purchased by consumers makes it even more critical data in determining the progress made so far in other areas of the economy in fighting inflation, especially now that the primary cause of inflation, seen as rising energy costs, has been removed.
An increase in the Core PCE often gives the impression that inflation is a fundamental factor immanent in the economy, not just due to high energy and food costs alone.
Hence, a higher reading from the Core PCE could influence the Fed’s decision to tighten its monetary policy further to fight the rising inflation rate.
Aside from the Core PCE, another important event that investors are looking at to strengthen their bullish attitude towards the US Dollar Index (USDX) is the all-important speech to be delivered by Fed Chair Powell today at the ongoing Jackson Hole Symposium held at Jackson Hole Valley, Wyoming, US.
The Jackson Hole Symposium is an essential economic gathering organised annually by the Federal Reserve Bank of Kansas. This event brings together economists, Federal Reserve officials, policymakers, central bank officials across the globe, and other market participants to discuss the critical economic issues troubling the macro-economies, including the U.S. and every other country present.
Representatives of each country present during this session will be expected to make a speech on the policy to be adopted by the country’s monetary policy committee to push their economy forward amidst rising inflation.
However, investors are more attracted to the direction of Powell’s speech during his address to be presented today at this symposium since the US dollar sets the tone for other currency pairs in the forex market.
Powell will have to expound on the current stance of the Fed in rescuing the US economy from rising inflation and how they intend to achieve this.
Predominantly, investors hope Powell would maintain the previous committee’s aggressive stance toward hiking the interest rate during his speech today.
This will further assure investors that a more aggressive interest rate hike for the US dollar is possible during their next session in September.
However, some analysts foresee a possible direction change from Powell during his speech today. This group anchored on the previous historical records of what transpired the last two years during this same event, when investors hoped for a more aggressive stance from Powell, but he disappointed them and instead revealed that the committee had developed a new model for determining when and how to raise interest rates further, insisting that the committee would no longer proceed to raise the interest rate just because unemployment was falling and inflation was expected to heat up soon.
The same was repeated last year during his address. Here, Powell laid out the reasons to convince investors and every other member present at this event that inflation at the time would be a temporary phenomenon and would fizzle away once the global markets rekindled after the pandemic.
Powell’s stance on interest rates has remained unpredictable since then.Hence, his speech today has been described as the most crucial factor to drive the forex market during this event, which will last till Saturday.
How will the outcome of the US Core PCE Price Index and Powell’s speech today affect the dollar index (USDX)?
The Core PCE data and Powell’s speech have been interpreted as the two most important fundamental factors in moving the dollar index (USDX) today. The direction they are to move this pair depends on their outcome.
Higher readings from the Core PCE would point to a reduction in the inflation rate, which has caused consumers to increase their spending. This will signal that the Fed might slow down on further aggressive interest rate hikes because of the reduction in the inflation rate. Such news is the least of what investors would entertain. Hence, the result will be a massive selloff for the US dollar, which will cause a decline in the dollar index.
On the other hand, should there be a reduction in the core PCE reading delivered today, investors will be more excited to find further conviction that the Fed will probably hike the interest rate in September due to rising inflation. This will cause a more bullish trend for USDX.
The forecast for this data is 0.2%, while the previous record was 0.6%.
Nonetheless, with regards to Powell’s speech, what investors are looking forward to is for him to maintain a hawkish stance toward hiking the interest rate. This will give investors more reason to invest in the US dollar, causing a further increase in the dollar index.
On the contrary, should Powell disappoint investors by taking a dovish stance, we can expect a massive fall for the dollar index (USDX), which will be bullish for other pairs with the US dollar, such as their base currency, especially GBPUSD and EURUSD.
