The Federal Reserve is ready to continue raising rates if necessary. This was stated last Friday by the head of the U.S. central bank, Jerome Powell, during his speech at an economic symposium in Jackson Hole.
"Although inflation has moved down from its peak—a welcome development—it remains too high... The process still has a long way to go, even with the more favorable recent readings," said Powell, noting that the July PCE indicator will be 3.3%, the core — 4.3%. According to Powell, the Federal Reserve is "prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until [we] are confident that inflation is moving sustainably down toward [our] objective."
The dollar retains a positive dynamic after Powell's speech at the symposium, and its DXY index broke the 104.00 mark at the end of last week, reaching a 5-month high of 104.38.
Powell confirmed the readiness of Federal Reserve leaders for further tightening of monetary policy, which raises market expectations for another interest rate hike closer to the end of the year, although they remain unchanged regarding the September Federal Reserve meeting. Here, market participants expect the interest rate to remain at the current level of 5.50%, the highest among the interest rates of the other six leading and largest world central banks.
At the same time, the Federal Reserve clearly states that interest rates will be raised, while the leadership of other major world central banks expresses various, often opposite, opinions. This creates a foundation for the further strengthening of the U.S. dollar, especially as positive macro data continues to come from the U.S.
This week, market participants will closely monitor the publication (on Thursday at 12:30 GMT) of the core PCE price index, an inflation indicator that FOMC officials use as the primary inflation indicator, and the monthly U.S. Labor Department report (on Friday at 12:30 GMT) with data for August.
Annual PCE growth in July is expected to be 4.2% (after a 4.1% increase the previous month) and 170,000+ new jobs (excluding the agricultural sector), with unemployment stabilizing at 3.5%, close to multi-year lows.
In his speech last Friday, Powell also stressed that reducing inflation will likely require softer labor markets. Signs that the labor market isn't cooling down could also be a basis for further action by the Federal Reserve.
From a technical perspective, the dollar index DXY (CFD #USDX in the MT4 terminal) has broken into the medium-term bull market zone (above the key levels of 103.16, 103.52) and continues to develop an upward dynamic, moving towards the recent (May) local high of 104.65.
In the previous review, we noted that breaking the upper boundary of the newly formed range between 103.57 and 102.93 may signal a resumption of long positions in DXY. So far, events are unfolding exactly according to this scenario.
