US Dollar attempting to recover from Tuesday’s sell off

Expectations of a US Fed funds rate hike in September hit a roadblock this week after the ISM non-manufacturing PMI disappointed. After the August payrolls report came out softer than expected, whatever little hopes of optimism that remained was washed out after the US services activity hit a six-year low.

The US dollar fell to a 7-day low on Tuesday closing at 94.80. The following price action in the US dollar index saw prices testing a new 7-day low at 94.45 before managing to close the day slightly bullish.

In terms of Fed speak, Kansas City Fed President Esther George and Richmond Fed President Jeffrey Lacker testified to a subcommittee of the House Financial services committee this week. Esther George said, “I believe we are at or near full employment,” while Lacker said that the labor force participation rate fell, and demand was sluggish. He attributed the declines to stagnating productivity. The Fed-speak offered little for investors in understanding the Fed’s outlook and the implications on the upcoming FOMC meeting.

The Fed’s Beige book, which is a summary from the twelve Federal Reserve Districts, painted a steady view that the national economic activity continued to expand moderately through July and August. Most of the districts reported a moderate pace of overall growth, while Kansas City and New York reported no change in activity.

Next week’s inflation and retail sales report will be key

The week ahead could offer some direction for the US dollar. On Monday, Federal Reserve Board member, Lael Brainard is expected to speak at the Chicago Council on Global Affairs. Her speech will be the last of the Fed speeches ahead of a weeklong blackout period running into the September 21st FOMC meeting.

Later in the week, US retail sales due on Tuesday will be the main event to watch for. Expectations call for a 0.30% increase in core retail sales on a month over month basis. This follows July’s decline of 0.30%. The headline retail sales figure is expected to stay flat. The Fed’s Beige book report noted that consumer spending was little changed, and auto sales declined but remain near the upper end of the long-term trend. The retail sales report is followed by the consumer price index data due on Friday, all of which could play into shaping investor sentiment ahead of the Fed’s meeting the week after.

US dollar index – Bearish flag, but conflicting signals

The US dollar index has been in a short-term decline after hitting local highs of 96.00 a week ago. The bounce which came off a reversal near the 94.00 – 94.30 level saw prices retesting the breakout level and pushing a bit higher from the bearish flag pattern. This could potentially put the US dollar index in store for further declines to at least 93.50.

However, there are conflicting signals as the chart also shows a potential inverse head and shoulders pattern with the neckline resistance formed near 96.00 – 96.30. As long as the previous low near 94.00 – 94.30 holds and price forms a higher low at the current levels of 95.00, the US dollar index could be seen pushing higher. In this case, the inverse head and shoulders pattern could be seen pushing the US dollar towards the 97.15 – 97.35 resistance level.