Wednesday, August 26, 2020

The dollar may retest its recent lows this week on possible dovishness from Fed Chair Jerome Powell’s speech this week

  • Dollar
  • Federal Reserve


Analysts’ Pick: The dollar may retest its recent lows this week on possible dovishness from Fed Chair Jerome Powell’s speech this week

  • Durable goods orders will probably add to the list of economic data that shows the US economy recovering at a slower pace than June, and as a result have limited impact on the dollar today
  • Focus will instead be on initial jobless claims data and Fed Chair Jerome Powell’s speech later this week, which may be able to put some downward pressure on the dollar to retest the recent lows
  • Initial jobless claims uptick for the week ended in August 14th was likely overstated due to seasonal adjustments, meaning that it was more indicative of a high unemployment environment instead of a potential second wave of layoffs in the US
  • Look out for hints on forward guidance in Powell’s speech, which we think will feature some of the Fed’s thoughts on shifting towards average inflation rate targeting in the near future.

The latest data from the US Conference Board was another indication that stock market valuations are shifting further away from the current state of the US and global economy. Both the expectations and current situation metrics of the Conference Board's consumer confidence survey suffered, but had little impact on the US stock market on Tuesday despite a large downside surprise. This suggests that the news that the US-China phase one trade agreement would stay intact was a larger driver for stock valuations instead, implicitly signalling that investors may be looking for only good news instead of data on the real economy.

Consumer confidence was impacted by both poorer expectations and present situations; expectations remain low thanks to delayed fiscal stimulus, suggesting that consumers are likely to reduce spending to hoard cash


PE ratios at high levels also suggests this, with a strong skew towards tech and tech-related stocks and pushing them higher despite little growth drivers. Apple's and Tesla's shares show this phenomenon after their respective stock split announcements, driving both stocks to new record highs despite a stock split adding no real economic value to the company.

Apple’s stock outperformed the Nasdaq 100 index after its stock split and earnings announcement (AAPL vs NDX Rebased to 100)


Tesla’s shares spiked again after declaring a stock split in mid-August (TSLA vs NDX Rebased to 100)


As a result, today's durable goods orders dataset is unlikely to be strong driver for the greenback. More probable is for the dollar to suffer another temporary and mild pullback today on the releases of the dataset as it continues to show the US economic recovery slowing, especially since economists seems to have already factored this into their forecasts (E: 4.7%). In addition, the incoming durable goods orders data is for July, which is likely to have little significance on investor sentiment since the current environment has forced a shift towards more forward-looking data while lagging indicators become more limited in impact.

Bloomberg’s survey of economists already suggests that the durable goods orders is likely to have a smaller impact on the dollar as expectations are for a continued slowdown in an economic recovery


Consequently, more emphasis is likely to be placed on Fed Chair Jerome Powell's speech at the annual policy symposium on Thursday (2am GMT +8), and jobless benefit claims data tomorrow as well. While the presidential elections are likely to contribute to movements on the dollar as well, with the Republicans concluding their convention on Thursday, the greenback looks more likely to have a stronger impact from the aforementioned factors instead.

Last week, we saw a sudden spike up in initial jobless claims data for the week ended August 14th. The uptick in jobless benefit claims suggested that we may be witnessing a second wave of layoffs in the economy as more businesses go bankrupt, a scenario that most economists - including the Fed -suspected. Investors will thus be focused on claims made for the week ended August 21st for confirmation of a possible second wave of layoffs. But it looks more likely that we will see initial jobless claims continue to decline, albeit at a slower rate than before as US President Donald Trump's executive orders to partially restore the enhanced unemployment benefits looks likely to benefit only a portion of Americans as a result of the program's restrictions and is only expected to reach Americans ranging from the end of August to the end of September. An overstatement in the increase in claims during the week ended August 14th due to seasonal adjustments (unadjusted figures show initial jobless claims rising 52,776 versus the 133,000-increase seen in seasonally adjusted figures, with seasonal adjustments looking for an additional 6.7% decrease in initial benefit claims) also signals that the likelihood of a second wave hasn't increased since before. Hence, we expect the dollar to trade in a downtrend on the release of the data thanks to increased volatility as traders prepare for Powell's speech in the hours following the release of the economic data.

Non-seasonally adjusted initial claims highlight an overstatement in the increase in initial claims for the week ended August 14th


Powell's speech will be closely watched due to the current environment of extreme easing in monetary policy, in conjunction to the completion of the Fed's policy framework review. The most recent FOMC meeting minutes (for July's monetary policy meeting) hinted at the Fed's outcome for its monetary policy framework review. These signals came coupled with signs that policymakers were also looking to utilise forward guidance as a tool, but at a later date than initially expected. Consequently, traders will be looking at Powell's speech for signals on both these factors. At this point, no one should be expected additional easing in terms of negative interest rates, with Fed officials already signalling little benefits in doing so. Instead, it seems most probable to couple forward guidance with the Fed's framework review outcome possibly at the meeting at the end of 2020 or in January 2021. This seems to be case thanks to the upcoming November presidential elections, which should also impact the US economy's outlook depending on the candidate that wins the elections. Powell may also hint at a possible shift away from the current 2% inflation targeting to adopt an average inflation rate targeting approach, since this will allow the US economy to overshoot the central bank's target inflation rate for a period of time to avoid tightening monetary policy too early. This would likely negatively impact the dollar in the short-term since it would signal more dovishness from the Fed in regards to the economy and it will appear to be more likely that the current level of monetary policy will be maintained longer-than-expected.

The dollar index looks likely to resume its decline this week as a result, possibly down towards 92.60's level to retest the more robust support level at 92.26, representing a downside potential range of about 0.69% to 1.05%. Upside risks for the dollar on the week will be mainly focused on downward surprises in economic data, as well as another escalation in US-China tensions on issues other than trade.

Technical Analysis:


The dollar has been trading at a tight range with an overall bearish trend. This looks likely to continue despite some signs that multiple small corrections have occurred over the past two weeks following the sharp and fast downturn in the greenback. We expect to see more downside, but to a limited extent as a potentially weakening euro may provide some support for the index. With catalysts in unemployment claims and Powell’s speech upcoming, we may see a retest of the support level at 92.60 and eventually 92.26, but it looks unlikely to be able to break that level convincingly into a deeper downturn.

Support: 92.60 / 92.26 / 91.92

Resistance: 93.85 / 94.46 / 94.77

DXY Chart (H4)