The Dollar has staged a spectacular rebound in recent months, as market expectations intensified over the Federal Reserve raising interest rates faster than expected this year.
Robust U.S. economic data during the second quarter of 2018 boosted sentiment towards the U.S. economy; while consistent signs of rising inflationary pressures stimulated rate hike expectations. With escalating trade tensions sparking jitters and leaving investors on the edge, the Dollar extended gains as uncertainty fuelled safe-haven demand. With the Greenback already appreciating as much as 6 percent over the last three months, market players are now questioning if Dollar bulls have enough steam to elevate prices higher in Q3.
As the third quarter of 2018 gets underway, the Dollar’s visible inverse correlation with global risk sentiment could translate to further upside if trade tensions escalate. Consistent signs of strong domestic economic growth should boost buying sentiment towards the Dollar, while a healthy labour force and accelerating wage growth may continue to support rate hike bets. Rising inflationary pressures during the third trading quarter may further heighten speculation over the Federal Reserve adopting a more aggressive approach towards monetary policy normalisation.
Fed chair Jerome Powell will be in sharp focus this week as he delivers his testimony on the economy and monetary policy to a Senate committee. The Dollar could witness further gains if Powell adopts a hawkish stance and reiterates his comments on how the U.S. economy is “in a good place”.
It is worth noting that interest rate differentials are likely to continue playing an important role in the Dollar’s appreciation. The European Central Bank is expected to retain the zero-interest rate policy (ZIRP) until after Summer 2019; while Brexit uncertainty has clouded Bank of England rate hike expectations. With the Bank of Japan seen maintaining its ultra-lose monetary policy until inflation hits 2 percent, the Federal Reserve still remains the most hawkish when compared to other major central banks.
In regards to the technical picture, the Dollar Index remains heavily supported on the weekly charts above the 93.20 level. The consistently higher highs and higher lows on the weekly timeframe reinforce the bullish bias towards the Dollar. A solid weekly close above the stubborn 95.00 resistance level could signal further upside with 96.40 acting as the next key level of interest. A situation where bulls are unable to conquer the 95.00 level could trigger a selloff back towards the 92.30 higher low.
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