The USD has recently demonstrated an upward trend, after higher inflation data last week but still below 3.3% expectations y/y. Higher USD could also be attributed to the Federal Reserve’s (FED) desire to gather more comprehensive inflation and employment statistics before considering an end to their cycle of interest rate hikes.
Consequently, there remains a possibility that the Fed may continue with further rate hikes until these critical data points are assessed.
It’s important to note that the current period is mid-August – a time when market activity traditionally slows down. Hence, the observed decline in stock prices, contributing to the USD’s ascent, is a predictable outcome.
Examining the graph depicting the relationship between US yields and the USD Index, it’s evident that yields are progressing through a ‘fifth wave’.
However, historical patterns indicate that a cycle often shifts after the completion of a five-wave movement. This transition could potentially occur this year, as suggested by the 10-year US yield weekly chart. Should yields indeed be entering the latter stages of recovery and the FED consider concluding its rate hike cycle by year-end, this might serve as a catalyst for a downward trajectory in the DXY (USD Index).
This reversal could initiate around the technical resistance level of 105. Concurrently, the 10-year US yield could stabilize around the 4.5%.
So longer-term, I think dollar weakness will still show up. But in the short-term, there may be some more dollar strength, thus creating an opportunity to short some softer currencies like AUD or NZD.