The U.S. dollar reached its lowest point of the year on Tuesday as market participants anticipated the Federal Reserve’s upcoming interest rate cuts.
The dollar has dropped to levels not seen since early January, reflecting expectations that the U.S. central bank will begin lowering rates next month.
This decline is factoring in a “soft landing” and rate cuts, which are bearish for the dollar.
Currency traders are now focused on Fed Chair Jay Powell’s upcoming speech at the Jackson Hole symposium on Friday, where he is expected to provide insights into the future path of U.S. interest rates.
Following strong retail sales figures that eased fears of an imminent recession, markets are now pricing in three to four quarter-point rate cuts by the Fed before the year’s end.
Earlier, traders had anticipated up to five cuts this year after a weak jobs report.
Asset managers have shifted from a highly positive outlook on the dollar to a neutral stance over the past two years.
The U.S. dollar outlook will depend on a clearer understanding of the Fed’s easing trajectory.
It’s Not Just About the Fed
The dollar’s decline has also been fueled by the unwinding of popular “carry trades,” where investors borrow yen at low interest rates and use it to buy higher-yielding currencies like U.S. dollars.
They then invest in bonds, stocks, or other financial instruments denominated in these higher-yielding currencies.
In simple terms, as long as the yen weakens against the dollar, the carry trade remains profitable. However, when the yen strengthens, the carry trade can unwind, leading to global market volatility as investors are forced to sell off positions funded by this trade.
For example, on July 31, the Bank of Japan unexpectedly raised rates and hinted at further increases. This caused the yen to strengthen significantly against the dollar, moving from about 154 to 141 in six trading days, or over 1,200 pips!
On August 6, the Bank of Japan’s Deputy Governor Uchida clarified that no more rate hikes were planned soon, leading to a weakening of the yen and causing USD/JPY to bounce back over 600 pips!
The Yen Remains a Key Driver
The point is that the Japanese yen (JPY) remains a key driver of currency market volatility.
So, while everyone and their mamas are focused on Fed Chair Powell’s upcoming glamping appearance at Jackson Hole, there might be another person to watch out for…
A couple of hours before Powell’s speech, Bank of Japan Governor Ueda will address the Japanese parliament.
If Ueda takes a more aggressive stance on raising rates than anticipated, it could cause the yen carry trade to unwind (again), triggering massive global market instability (again), including all major currencies.
Be careful out there!
Currency Market Movers
Let’s review the price action in forex today.
Which currency pairs gained the most today?
NZD/USD was the leader of the pack, gaining 0.61% or 37 pips.
As shown by our FX Market Movers page, NZD/CAD and EUR/USD won the silver and bronze medals today.
Looking at the NZD/USD Trend Following Rating, it’s showing a Bullish rating.
The currency pair has managed to climb back above ALL of its major moving averages, which now act as dynamic support areas.
But the NZD/USD Overbought/Oversold Rating is showing “Overbought“.
Which currency pairs lost the most today?
USD/CHF was the biggest loser, falling 1.02% or 88 pips.
Looking at the USD/CHF Pivot Points, the price looks to be trading near multiple pivot point levels.
Currency Strength
What was the overall strength or weakness of individual major currencies today?
Based on the Currency Strength Meter on MarketMilk™, CHF was, by far, the strongest currency, while USD was the weakest currency.
If we dive a little deeper and look at just how major currency pairs moved over the past 24 hours, we can see just how NZD/USD strengthened across all trading sessions.
Currency Short-Term Trends
When it comes to short-term trend strength, NZD shows the most bullish strength.
The USD shows the most bearish strength.
Currency Heat Map
If we take a look at our currency heat map, we can see the weakness of USD across timeframes.
Currency Volatility
Which currency was the most volatile today?
Based on our Currency Volatility Meter, it’s the JPY.
Check out the increase in volatility today for major currencies. Notice just how volatile JPY has been over the past 24 hours.
Which currency PAIR was the most volatile today?
Given that JPY was the most volatile currency, which pair?
USD/JPY was the most volatile, moving 1.49% or 214 pips.
