US Dollar on the Edge: Fed Rate-Cut Pressure Meets Durable Goods Boost

The US Dollar has faced significant pressure following the Federal Reserve’s indication of potential rate cuts in September, leading to a 0.83% decline in the US Dollar Index last Friday. Despite this, the currency found some relief from strong durable goods orders in the US and weakening economic sentiment in Germany, which helped the Dollar recover part of its weekly losses. The EURUSD exchange rate also reacted to these developments, with the Euro weakening by 0.3%.

In July 2024, US durable goods orders surged by 9.9%, driven primarily by a boom in transportation equipment. This strong performance contrasted with the growing economic challenges in Germany, where business confidence has declined, further supporting the Dollar. As a result, the US Dollar Index managed to bounce off a key support level, though it remains vulnerable within a long-standing sideways market.

The US Dollar Index remains vulnerable after the Fed’s rate-cut signal leading to a 0.83% decline on Friday. However, the strong US durable goods orders coupled with pessimistic expectations from the German economy and conditions, the largest economy in Europe, saw the EURUSD exchange rate decrease yesterday by 0.3%. Nevertheless, the US Dollar Index managed to bounce off the key support level of 100.617 and recover some of the weekly losses of 1.68%.

In July 2024, the US Census Bureau reported a significant increase in new orders for manufactured durable goods, rising by 9.9% to $289.6 billion, driven primarily by transportation equipment. This marks the fifth increase in the past six months, following a 6.9% decline in June. Shipments also saw a 1.1% rise to $291.1 billion, while unfilled orders and inventories experienced modest growth. Notably, nondefense capital goods orders surged by 41.9%, indicating strong demand in this sector. The report highlights ongoing fluctuations in the manufacturing industry, with transportation equipment playing a central role in recent growth.

The ifo Business Climate Index in Germany decreased from 87.0 points in July to 86.6 points, despite surpassing economists’ forecasts, reflecting growing pessimism among companies. The manufacturing sector saw a significant drop, with companies less satisfied with their current situation and reporting declining order backlogs. The service sector also experienced a decline in business climate due to worsening expectations. While the trade sector saw a slight improvement, it was mainly driven by less pessimistic expectations. The construction sector remained stable, with a slight increase in satisfaction offset by declining expectations. Overall, the data suggests that the German economy is increasingly facing challenges, with sentiment deteriorating across multiple sectors.

The US Dollar Index has been trapped in a sideways market since 2023, with an upper boundary at 107.348 and a corresponding low boundary at 99.578. If the bulls manage to take market control and lift the price off the lows, then three potential upside targets may be estimated: 101.625, 101.799, and 102.945. On the other hand, if the bears continue to maintain control, then the following downside targets may be in focus: 99.945, 99.578, and 98.398.

In conclusion, the US Dollar is in a delicate position, pressed by potential rate cuts from the Federal Reserve and supported by strong domestic economic data and weakening European sentiment. While July’s surge in durable goods orders provided a temporary boost, the overall market outlook for the Dollar remains uncertain. As the US Dollar Index continues to trade within a well-defined range, market participants will closely monitor key technical levels to gauge the future direction of the currency amidst these mixed economic signals.