– Dollar bulls dominated the FX space during the first half of 2022, trampling any obstacles that came their way. G10 currencies were practically flattened by the greenback’s might with the pound shedding 10% and yen over 15%.

But the scales of power seem to be veering in favour of bears in Q3 as the fundamental drivers shift. This can be reflected in the currency’s mixed performance since the start of July.

After reaching its highest level since mid-2002 back in July, the Dollar Index (DXY) has found itself vulnerable to losses thanks to profit-taking. Reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures also capped upside gains.

Taking a quick look at the equally weighted dollar index, prices staged a rebound this morning as disappointing data from China fuelled global recession fears. Nevertheless, the trend still favours bears due to the consistently lower lows and lower highs.

With inflation cooling in the largest economy in the world and investors cutting rate hike bets, USD bulls may be in trouble. However, recession fears and geopolitical risks could send investors rushing toward the dollar which acts as a beacon of safety in times of uncertainty.

So, are dollar bulls are running on empty fumes or taking a break before switching to higher gear? While we may not get the answer this week, the pending FOMC meeting minutes, US economic data, and speeches from Fed officials could offer fresh insight.

The low down…

There were three major drivers behind the dollar’s appreciation this year.

1. Interest rates
2. Strength of the US economy
3. Dollar’s safe-haven status

The Fed’s aggressive approach towards rising interest rates in the face of soaring inflation sent the dollar rallying as rate differentials widened against other currencies. As investors looked at the strength of the US economy, relative to others this also boosted appetite for the greenback. Lastly, geopolitical risks, global growth concerns, and overall uncertainty sent market players rushing toward the world’s reserve currency.

Fast forward to today, signs of easing inflationary pressures have prompted investors to cut bets on how aggressive the Fed will be in raising interest rates. The latest CPI figures revealed inflation cooled 8.5% in July compared to the 8.7% expected and a significant drop from the 9.1% increase in June. In regards to the US economy, it contracted for the second straight quarter in Q2, signalling an unofficial start of recession, further dampening appetite for the dollar. Given the unfavourable macroeconomic environment and geopolitics at play, investors remain cautious and this could result in increased appetite for the safe-haven dollar. All in all, when considering how 2/3 of the major drivers powering the dollar have weakened, this could encourage bears to pounce.

The week ahead…

It could be a volatile week for the dollar thanks to the pending US reports and speeches from Fed officials.

However, all eyes will be on the Federal Reserve meeting minutes on Wednesday. This will be closely scrutinized by investors for any fresh clues and insight into what policymakers were thinking when rates were hiked by 75 basis points for a second straight meeting. If the minutes sound hawkish, this could offer the dollar some support. On the flip side, any hint of doves may encourage some fresh dollar weakness. It will be wise to keep an eye on the US retail sales report for July published mid-week and speeches by Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari on Thursday.

Dollar to resume decline?

After breaking out of the weekly bearish channel, the equally weighted dollar index could be gearing for steeper declines.

Prices turned bearish after securing a solid weekly close below 1.1700. Sustained weakness under this level could trigger a selloff towards 1.1380.

Should 1.1700 prove to be reliable support, a move back towards 1.1900 could be on the cards.

On the daily charts, prices punched higher this morning thanks to fundamental forces but the technical picture still favours bears. A move back below 1.1700 could suggest a decline towards 1.1630 and 1.1450. Should 1.1700 prove to be reliable support, prices may test the 50-day Simple Moving Average and 1.1950, respectively.