Is the US dollar gearing up for a big picture breakout?

US dollar talking points

• The US dollar traded at a fresh two-year high on the heels of the July FOMC rate decision
• The FOMC was non-committal towards future action, initially diminishing odds for further cuts in the remainder of the year
• Since that rate decision, another driver of interest has stolen the headlines when US President Donald Trump announced additional tariffs on China, and odds for another cut in September have shot higher

The US dollar (USD) has been in the spotlight as the Federal Reserve (Fed) has cut rates for the first time since the financial collapse. This comes after the bank hiked rates a full nine times in the prior four years and seven times in the previous two. But when the Fed did make this shift, they did so amidst a lack of clarity, leaving market participants to continue wondering whether this rate cut was a one-off adjustment after the bank had overtightened last year, or whether this was the start of a new trend or cycle of softening out of the US central bank.

To be sure, the question itself is a bit of a quandary. The Fed’s stated mission, the dual mandate, doesn’t appear to be in dire need of support at the moment. While inflation has slowed, core inflation remains above the Fed’s 2% target. And employment gains have held as the unemployment rate remains pegged near multi-decade lows. So, neither of those factors are really screaming for help right now but, as discussed by Fed chairman Jerome Powell at the accompanying press conference, risks in international markets combined with slowing growth had started to cause alarm at the Fed, and this is what helped to bring on that first rate cut since 2008.

In response, the US dollar jumped up to a fresh two-year high, and not because the bank cut rates, but this is likely more related to the fact that the Federal Open Market Committee (FOMC) provided little clarity for what might happen next.

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US dollar daily price chart

After that topside move, prices came rushing back in the 24 hours after the rate meeting. This was again complicated by yet another drive of importance when President Trump announced even more tariffs on China. This helped the US dollar to drop back below the 98.33 level that had previously helped to mark the yearly high in the USD. But, perhaps more importantly, this highlighted a driver that will likely remain as important in the coming months.

President Trump has openly talked about currency weakness in the past, pointing fingers at economies such as Europe, Japan or China taking advantage of weak exchange rates in the effort of boosting exports. This is also something that’s helped to bring the Federal Reserve squarely into the focus of the US President, as the Fed hiking seven times in 2017 and 2018 brought upon considerable strength in the US currency, thereby making it more difficult for American manufacturers and exporters. So, the timing of President Trump’s increased tariffs on China is likely not coincidental, as he had previously said he would like the Fed to be more aggressive with their softening.

The fact that the very same international risks that Jerome Powell cited as a cause for the cut are now exacerbated by even more tariffs is likely not an accident, and in response, markets have already begun pricing in another cut for the bank’s rate decision in September.

Taking a further step back on the chart and the US dollar is trading at levels that haven’t been very common in the US currency over the past 15 years. This can raise the bar for further gains, particularly considering the fundamental backdrop that we find ourselves in.

US dollar monthly price chart

Is the US dollar gearing up for a big picture breakout?

US dollar bulls are probably going to need to wait for that fresh breakout to run beyond the 100 level and beyond, and not necessarily just because of the stance at the FOMC. This scenario has already caught the ire of President Trump and as another election is around the corner for next year, we are likely going to see considerable support for the US economy going into that vote. This means that strong economic data may continue to be offset by negative turns in the ongoing US-China trade war. And if equity markets do need a boost, a bit of good news is just one tweet away. But – for the US dollar, it appears as though few of the controlling interests in the situation want to see a stronger greenback, as it merely makes the continued recovery that much more difficult to maintain.

For August price action, the key variable to follow is a hold of resistance at the Thursday high. This can keep the door open for strategies of USD weakness, and on the weekly chart, an inverted hammer formation has formed. Such a backdrop will often be followed for bearish reversals as it can be a sign of potential capitulation. Bulls were not only able to hold fresh highs but the move elicited a bearish response that wiped out most of the prior bullish run.

US dollar weekly price chart