DXY: dollar's fall halted amid dew of tensions around Taiwan


The DXY dollar index stopped its fall today (before that, it had been declining for 4 days in a row amid a disappointing report on US GDP for the 2nd quarter), and quotations of commodity currencies and major global stock indices fell sharply amid rising tensions in the situation around Taiwan. Thus, the Chinese Shanghai Composite index lost more than 2% today.


As is known, Speaker of the US House of Representatives Nancy Pelosi is expected to visit Taiwan in the near future, and China has already reacted sharply to this proposed visit. The authorities of the country adhere to the position of one China, including the island of Taiwan, and in response to a possible visit by Pelosi to Taiwan, Beijing has formulated a number of countermeasures, including military action. "There will be serious consequences if she insists on a visit," Chinese Foreign Ministry spokesman Zhao Lijian said.

Meanwhile, yesterday's data on business activity in the manufacturing sector added to the negative mood of investors: PMI from S&P Global came out with a value of 52.2 in July (below the value of 52.3 in June), and a similar indicator from the ISM supply management institute - with a value 52.8, which is also lower than the previous value of 53.0. It should be noted that readings above 50 indicate an acceleration in activity, however, here market participants focused on the relative decline in indicators after a disappointing GDP report.

Now the Fed is expected to have a softer increase in interest rates in September and a pause thereafter. Fed officials will now have to act extremely cautiously with possible further tightening of monetary policy, so as not to drive the US economy into a long-term recession.

As of this writing, DXY dollar index futures were traded near 105.34, 43 points below last week's close but 7 points above Monday's close.

The first signals for the resumption of long positions in DXY futures will be the breakdown of the local resistance levels 106.00, 107.00. In the meantime, investor confidence in the dollar remains at a low level.

Now the focus of investors is the report of the US Department of Labor with monthly data on the labor market, which will be published on Friday. Economists' forecast is for a slowdown in job creation (in non-agricultural sector) to 250,000 from 372,000 in June, although the unemployment rate is likely to remain at 3.6%. If the labor market data turns out to be worse than forecast, then the Fed will have less room to maneuver when planning its monetary policy parameters and more arguments in favor of taking a pause in the interest rate cycle. If the Fed leaders announce the resumption of stimulus, which is also not ruled out if the situation in the US economy worsens, then the fall of the dollar cannot be avoided.