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US Dollar Outlook: DXY Whipsaws as Fed’s Powell Stays Evasive

The US Dollar whipsawed on Wednesday as initial strength quickly turned into weakness around the Fed. FOMC officials unanimously left policy unchanged as anticipated, but updated language in the press statement acknowledged how the economy is making progress toward the central bank’s maximum employment and price stability goals.

This caused a knee-jerk reaction by US Dollar bulls as this appeared to give a nod to the threshold for tapering asset purchases. Upon scrutinizing exact verbiage in the statement, however, markets discovered the key “substantial” qualifier was left out. That fueled US Dollar bears to fade the rally with selling pressure accelerating after Fed Chair Powell expounded on this messaging.

FED CHAIR POWELL SAYS WE ARE A WAYS AWAY FROM SUBSTANTIAL PROGRESS ON JOBS
Specifically, Fed Chair Powell noted how the labor market still has a ways to go before reaching substantial further progress. Powell added that while conditions have improved and demand is strong, the unemployment rate continues to understate the degree of joblessness. The Federal Reserve head also echoed how the central bank still sees inflation as transitory and long-term inflation expectations in line with its goal.

Powell also mentioned that while successive waves of COVID-19 are having diminishing impact on the economy, it is plausible that consumers might pull back on activity due to fears surrounding the delta variant. This all seemed to strike a dovish tone and provide justification for the Fed to stay patiently accommodative as officials debate the scope and timing of tapering. As such, upcoming releases of employment data and the annual Jackson Hole symposium stand out as key risk events for markets.

DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (17 FEB TO 28 JULY 2021)
Shifting focus to a technical perspective, it looks like the US Dollar could be primed to surrender recent gains. This is considering how the broader DXY Index just closed below ascending trendline support and the 23.6% Fibonacci retracement level of its latest bullish leg. Likewise, negative divergence seen on the relative strength index and accelerating downward momentum as suggested by the MACD both serve as constructive developments for US Dollar bears. Continued US Dollar weakness might see the DXY Index extend its slide toward the 50-day simple moving average.


Reference by: Rich Dvorak, Analyst for DailyFX.com

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