Dollar outlook: Jackson Hole meeting focuses on Federal Reserve policy, dollar index is mixed

In the US market on Tuesday (August 19), the dollar as a whole showed a divergent trend, mainly weighed down by the cautious sentiment ahead of the annual meeting of global central banks in Jackson Hole this week. At this meeting, the speech of Federal Reserve Chairperson Jerome Powell will provide guidance for short-term interest rate expectations. Traders are readjusting their positions due to the absence of important economic data ahead of Powell's speech on Friday. The previous divergent inflation signals and weak employment data in July have boosted market bets for a rate cut in September.

Although weak non-farm payrolls data and a slowdown in consumer price index (CPI) growth in July initially strengthened the market's dovish expectations, the producer price index (PPI) rose faster than expected year-on-year, raising questions about "whether inflation risks have really been contained". Powell has previously warned that tariffs could lead to accelerated inflation, a statement that further highlights the importance of his upcoming speech.

The probability of a rate cut is repriced, but the risks are balanced

Markets have trimmed their aggressive rate-cutting bets from last week, pricing in an expected 20 basis points cut in September and about 54 basis points by the end of the year - down from previous expectations of "25 basis points cut in September and more than 50 basis points cut by the end of the year".

Vassili Serebriakov, a strategist at UBS, believes that current market risks have become more balanced, which means that even if Powell does not fully endorse the September rate cut, the room for market disappointment will be relatively limited.

The Fed's July meeting notes are due to be released on Wednesday but are likely to be of limited value because they predate the weak jobs data. Traders are watching closely for subtle shifts in tone to gauge whether the Fed has become more open to easing.

Dollar trading was flat, while the euro and yen strengthened slightly

The euro edged higher against the dollar (EUR/USD) at 1.1671, or 0.09 percent, while the dollar fell 0.15 percent against the yen (USD/JPY) at 147.64. Volatility in currency markets has declined in recent weeks as traders have reduced risk exposure ahead of the central bank's policy guidance. After the dollar fell sharply earlier this year,foreign exchange marketIt is currently in the consolidation stage.

Geopolitical risks remain a secondary concern, with markets tracking progress in the peace process related to the Russian-Ukrainian conflict, but the overall focus remains firmly on monetary policy.

Treasury yields fell ahead of key Federal Reserve signals

Treasury yields edged lower on Tuesday. The yield on the two-year Treasury fell 2.5 basis points to 3.748 percent, while the yield on the 10-year Treasury fell 3.1 basis points to 4.308 percent. The weakness in yields reflected investors' caution and position adjustments ahead of Powell's speech on Friday.

Outlook: Dollar index awaits Powell's guidance, with downside risks predominant

(Dollar index daily chart, source: Internet)

With the dollar strength fading and Treasury yields edging lower, the dollar index has reached a critical juncture. If Mr. Powell plays down inflation concerns and accepts the market's pricing in a rate cut, the dollar index could further decline, testing the key support level around 97.80. Conversely, if Mr. Powell releases a hawkish signal, it could trigger the dollar index to retest the resistance range of 98.50. Until then, the dollar index is likely to move within a narrow range and traders' confidence in holding positions is low.

From a technical perspective, all eyes are on the 50-day moving average of 98.100. Traders' reaction to this technical indicator will determine the tone of the market until the end of the day: if the dollar index breaks through the pivot level of 98.317, it may strengthen further; but if it breaks through the recent low of 97.626 and has strong momentum, it may continue the weakness.

At 01:35 Beijing time, the US dollar index was trading at 98.1950/2120, an increase of 0.05%.