US Dollar Index Rises for Fifth Consecutive Week! What's the Next Move?

Last week (8/14-8/18), the US Dollar Index rose by 0.5% as most non-US currencies fell. The only currency that gained against the US dollar was the British Pound, which rose by 0.3% due to unexpectedly high inflation data increasing market expectations of further interest rate hikes by the Bank of England.

【Source: MacroMicro  Date2023/8/14-2023/8/18】

【Source: MacroMicro  Date2023/1/1-2023/8/18】

Last week, the US dollar index experienced its fifth consecutive weekly gain due to two main factors. Firstly, the continuous rise in long-term Treasury yields and secondly, driven by risk aversion sentiment.

【Source：MacroMicro 】

The increase in US Treasury yields was attributed to strong economic data from the United States and the hawkish tone of the Federal Reserve's July meeting minutes.

Data revealed a 0.7% month-on-month growth in US retail sales for July, surpassing market expectations of 0.4% and the previous value of 0.2%, indicating the resilience of the US economy. Additionally, the July meeting minutes of the Federal Reserve indicated that most committee members believed there was a significant upside risk to inflation as it remained well above the Fed's long-term target, while the labor market remained tight. This could require further tightening of monetary policy.

These factors intensified concerns in the market about the Fed maintaining the current high level of interest rates for a longer period, thereby providing further support to the US dollar.

Meanwhile, risk aversion stemmed from market concerns over fluctuations in the Chinese economy and the renminbi exchange rate. The recent increase in credit risks in China's real estate sector has heightened pessimistic sentiment regarding Chinese economic growth, leading to a further decline in risk appetite and consequently supporting the US dollar.

Mitrade Analyst：

This week, attention will be focused on the August PMI data for Europe and the United States, as well as the Jackson Hole Global Central Bank Symposium. If Fed Chairman Powell's speech leans hawkish, the US dollar is likely to continue to receive support.

On the technical front, the US dollar index has already surpassed the 200-day moving average, indicating a strong buy signal. However, the RSI is approaching overbought territory, and some oscillation indicators are showing sell signals, suggesting the possibility of a short-term pullback in the US dollar. Support is seen at 102.4, while resistance is at 104.2.

【Source：TradingView】

Last week, against the backdrop of a 0.5% strengthening in the US dollar index, the Japanese yen depreciated by approximately 0.3%, demonstrating some resilience. The main factor contributing to the relative strength of the yen is the risk aversion sentiment. Negative news regarding China's real estate market last week caused market nervousness and subsequently benefited the yen.

Furthermore, Japan's inflation data provided some support for the yen. Data released by the Ministry of Internal Affairs and Communications showed that the "core-core CPI," which excludes food and energy prices, rose by 4.3% year-on-year, slightly higher than the previous month's 4.2% and in line with analyst expectations. The growth rate of the services CPI accelerated from 1.6% to 2%.

The data indicates that there is still upward pressure on inflation in Japan, and it is possible that the Bank of Japan may adjust its monetary policy in the future.

【Source：MacroMicro 】

However, the strength of the US dollar continues to exert significant depreciation pressure on the yen. Against the backdrop of rapidly rising US bond yields, the US-Japan interest rate differential has widened, further enhancing the upward momentum of the USD/JPY exchange rate.

【Source：MacroMicro 】

Mitrade Analyst：

This week, data from Japan was relatively lackluster, with a focus on the Jackson Hole Symposium. If the Federal Reserve's expectation of higher interest rates is prolonged, the USD/JPY is expected to strengthen further. In the short term, the yen is expected to remain range-bound between 143 and 148.

On the technical front, the USD/JPY encountered resistance at the 146 level and retraced, with key support seen at 145. If it fails to hold above 145 this week, there is a greater probability of further price decline. Conversely, if it remains within that range, there is a short-term potential for retesting the previous high at 146.5.

【Source：TradingView】