Talking Points:
- Fed Chair Jerome Powell sounded hawkish yesterday and is likely to again at the House Financial Services Committee later on this morning.
- The DXY[1] Index is less than a quarter of a percent from its yearly highs established in mid- to late-June around 95.53.
- Retail traders[2] are starting to become more bearish on the US Dollar, which bodes well for its near-term outlook.
See our longer-term forecasts for the US Dollar, Euro[3], British Pound[4] and more with the DailyFX Trading Guides[5]
The US Dollar (via the DXY Index) reached fresh yearly highs today as traders continue to bid prices higher following Federal Reserve Chair Jerome Powell's two days of testimony on Capitol Hill. With the Fed on the path of gradual rate hikes, markets are now pricing in 25-bps tightening efforts in both September (90%) and December (64%) this year.
But the most notable development over the past few days is not related to the Federal Reserve, but a different central bank: the People's Bank of China. The offshore USD/CNH[6] rate hit a new yearly high itself today, its high exchange rate since July 12, 2017, amid a fresh wave of stimulus by the PBOC.
By using its medium-term loan facility (MLF) to help provide liquidity to banks, the PBOC is essentially rolling out its own quantitative easing program. In effect, the policy loosening effort serves another purpose: it weakens the Chinese Yuan.
While the China-US trade war appears to be morphing into a war of attrition, with both sides racking up casualties and without a clear end goal in sight for the tensions.
