U.S. Dollar Slumped as Fed September Rate Hike Seems Unlikely

Dear Traders,

The euro and British pound rebounded strongly against the U.S. dollar after bearish momentum failed to drive both currency pairs significantly lower. Ultimately, short-traders’ efforts did not pay off and we suffered losses with yesterday’s short-entries.

The Federal Reserve is more upbeat about the economic outlook, saying that near-term risks to the U.S. economy have diminished and that job gains were strong, the FOMC statement showed. However, there was no indication of the specific timing of the next potential rate hike and with Esther George being the lone hawk, it has not been enough for the greenback to maintain it strength. Consequently, traders gave up on dollar long positions as they see only little chance of a rate hike in September. The market is now pricing in a 50-50 chance of a rate increase in December.

The euro rose towards 1.1080 on the back of broad based dollar weakness. We now see a next resistance around the 1.11-level which could limit the gains in the EUR/USD. If the euro breaks above 1.1130 it could head for a renewed test of 1.1160. However, if prices fall back below 1.10 we will favor a bearish stance.

The British pound marked a strong support at 1.3060 from where it reversed. Given the recent sideways trend we will now focus on an upper bound at 1.33, whereas the 1.3060-level is seen as the lower bound of the cable’s trading range. Above 1.3350 the sentiment may shift in favor of the bulls but we expect short-term gains to be limited until 1.3410/50.

There are no major economic reports scheduled for release today. The German Unemployment report (due at 7:55 UTC) may have a short-term impact on the euro but the price action will depend on risk appetite.

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