On Monday (August 19th), expectations of a Fed rate cut in September continued to rise, causing the US dollar to fall to a seven month low. In the short term, it is difficult for the US dollar to make progress against major currencies, and investors are waiting for a new catalyst that may provide clues about the Fed's interest rate outlook this week. This week, the minutes of the Federal Reserve's July policy meeting and Powell's speech at Jackson Hole are expected to be the main drivers of the money market. This week, Canada will release inflation data, and any signs of further deflation in Canada could strengthen expectations for the Bank of Canada to continue cutting interest rates before the end of the year and affect the trend of the Canadian dollar, with the US dollar/Canadian dollar falling to a low point in over a month. We are waiting for further updates.

Under the pressure of market speculation that the Federal Reserve is about to begin its easing cycle, the overall US dollar has weakened. The US dollar index fell below 102.00, closing down 0.547% and hitting a low of 101.85, the lowest since January 2, closing at 101.86.

IG analyst Axel Rudolph said, "The Federal Reserve will cut interest rates by at least 25 basis points at its September meeting and by 94 basis points before the end of the year, which continues to put pressure on the US dollar as it depreciates against a basket of major currencies to a seven month low

In terms of economic data, the New York Fed's survey on consumer expectations shows that since the 2014 survey, the proportion of people who believe they may lose their jobs in the next four months has reached a historic high. But at the same time, compared to a year ago, more and more consumers are expected to get job opportunities in the coming months. Overall, the survey by the New York Federal Reserve shows that labor market volatility is intensifying, with workers becoming increasingly dissatisfied with their wages and benefits and insisting on higher wage expectations. After the July employment report showed an increase in unemployment, economists and policymakers have been highly vigilant about any signs that the job market may deteriorate faster than expected. The survey found that 4.4% of respondents expect to be unemployed in the next four months, the highest level on record.

The Conference Board announced on Monday that the US Leading Economic Index (LEI) fell 0.6% in July, marking the fifth consecutive month of decline. Previously surveyed economists predicted an average decrease of 0.4% in the index. The leading index is an indicator designed to show the economic turning point, but its indicative effect is poor after the COVID-19 epidemic. The index has been declining for two consecutive years, and then briefly turned positive in February. Specific data shows that indicators measuring the current economic situation remained unchanged in July after a 0.2% growth in June. After a 0.2% increase in June, the indicator for measuring lag decreased slightly by 0.1% in July.

ING foreign exchange strategist Chris Turner pointed out that better than expected retail sales data boosted the US dollar, "which prompted investors to shift their focus to pricing. The Federal Reserve will cut interest rates by 25 basis points on September 18th. However, the Fed equation will have a lot of data input, and the event calendar will begin next week. The focus will be on the University of Michigan consumer confidence data for August. This survey will be conducted during the stock market crash in early August and may see further declines in consumer expectations

The market is raising expectations for steady interest rate cuts, and they believe that Federal Reserve Chairman Jerome Powell will be confirmed in his keynote speech at the Jackson Hole Symposium on Friday, which will provide key guidance for future interest rate policies. A key event risk for this calendar cycle is Jackson Hole from August 22nd to 24th. During those days, the Federal Reserve's pricing may fluctuate, "said Francis Yard, strategist at Deutsche Bank.

The trend of the US dollar is still in a critical observation period, and the market performance in the coming days may depend on the outcome of these important events.

Daily chart of the US dollar index

Traders have fully digested the expectation of the Federal Reserve cutting interest rates by 25 basis points in September, with a probability of a 50 basis point rate cut of 24.5%. The futures market points to a loose space of over 90 basis points before the end of the year.

Carol Kong, a currency strategist at the Commonwealth Bank of Australia (CBA), said, "The market will closely monitor Powell's speech this weekend, and I believe this will be a great opportunity for Powell to either confirm or dismiss market pricing." She added, "I think he will at least give the green light for a rate cut at the September meeting. Nevertheless, he may maintain his option because we still have some data to release before the next meeting

Deutsche Bank economists have warned that the Federal Reserve will only cut interest rates by 75 basis points this year, with each meeting cutting rates by 25 basis points. This will disappoint current market expectations, potentially slowing down the pace of the US dollar's decline and even reversing recent declines.

In early August, due to poor performance of US economic data, especially the weak employment report in July, investors were concerned that the US economy may fall into recession, and the financial market experienced a turbulent start.

BBH FX Strategisys pointed out that the expectations of the monetary market for the Federal Reserve's aggressive easing cycle and the moderate improvement in financial market risk appetite reflected in the global stock market recovery are weighing on the US dollar. "Federal funds futures are still expected to implement a loose policy of about 100 basis points by the end of the year. We believe that the strong domestic demand activity and moderate deflation in the US macro effect are encouraging, indicating that the Federal Reserve is unlikely to lower the funds rate as currently priced. Therefore, there is room for upward reassessment of federal funds rate expectations, which is beneficial for the US dollar and bond yields

San Francisco Fed President Mary Daly stated in an interview with the Financial Times on Sunday that it is time to consider adjusting borrowing costs from the current range of 5.25% to 5.5%. Daley mentioned in an interview, "Progressivism is not weak, nor slow or lagging, but cautious." She also added that although the labor market is slowing down, it is "not weak. In her speech earlier this month, Daley stated that it is too early to determine whether the July employment report implies a slowdown or true weakness, but she warned that it is "extremely important" to prevent the labor market from falling into recession. She is "more confident" that inflation is moving towards the 2% target.

San Francisco Federal Reserve President Daley's speech indicates that the Fed is carefully considering adjusting borrowing costs to cope with the current economic situation. Although the labor market is slowing down, there are no signs of weakness.

Goldman Sachs economist Lexi Kanter said, "We expect Powell's message and off exchange interviews to be close to what we've heard in the past few weeks - the Fed is now close to cutting interest rates, but the degree of easing will depend on upcoming data." Goldman Sachs expects three consecutive 55 basis point rate cuts starting in September and believes that the market has priced a 50 basis point rate cut for the next meeting too far after weaker than expected employment data in July.

At present, it seems that if Powell pushes the market to lower its interest rate cut bets, the US dollar may rebound over the weekend.

The US dollar/Canadian dollar gave up its recent gains from the previous two trading days and fell to a low point in over a month. As of Monday's close, it fell 0.35% to close at 1.3632, the lowest closing price since July 12th. This downward space is attributed to the lukewarm US dollar after Fed officials made dovish comments on its policy stance, which increases the possibility of the Fed cutting interest rates in September. At the same time, the possibility of the Bank of Canada further cutting interest rates increases, thereby weakening the US dollar/Canadian dollar currency pair.

Trend chart of USD/CAD exchange rate

Economists expect that the July inflation data released this week will not prevent the Bank of Canada from cutting interest rates again in its next decision in September.

The July Consumer Price Index data to be released by Statistics Canada on Tuesday will be the Bank of Canada's final review of the latest inflation trends before the upcoming interest rate decision on September 4th. The market expects this data to increase by 2.5% year-on-year, lower than the previous 2.7%. The monthly index is expected to rise by 0.3%, marking a slight decrease from the previous 0.1% decline.

RBC economists Nathan Janzen and Claire Fan stated in a report last Friday that "the easing of inflation pressure in Canada has slowed in recent months. Data from June showed an annual inflation rate of 2.7%." RBC expects inflation to stabilize at these levels in July.

On the other hand, BMO Bank has called for a reduction in the annual interest rate to 2.6%, despite expectations that rising natural gas and travel costs will exacerbate inflationary pressures in July.

Benjamin Reitzes, the head of Canadian interest rates and BMO macro strategist, stated in a report that overall inflation should continue to ease, mainly due to the base year effect, which refers to the impact of changes in the CPI basket on inflation at this time last year.

But regardless of whether overall inflation cools down, remains stable, or slightly rises in July, most economists expect the Bank of Canada to cut interest rates again in September.

Stephen Brown, Deputy Chief Economist for North America at Capital Economics, said that although seasonal adjustments are usually the reason for the rise in summer travel prices, the surge in demand for vacations and air travel since the pandemic has had a huge impact on inflation. "Our seasonal peaks are more than usual, and this has not been corrected yet. Therefore, there are some upward risks to inflation compared to the expectations of the central bank in July." "" If price pressure accelerates in July due to travel costs, this may be a temporary phenomenon that central bank policymakers can ignore

At present, if price pressure accelerates in July due to travel costs, this may be a temporary phenomenon that central bank policy makers can ignore. Meanwhile, an increase in inflation is unlikely to cause significant changes for the Bank of Canada, as the Canadian economy is still struggling and there is significant deflationary pressure.

Meanwhile, given that Canada is the largest crude oil exporter to the United States (US), the Canadian dollar, which is linked to commodities, may face difficulties due to the decline in WTI prices, thus limiting the downward space for USD/CAD.

Shaun Osborne, Chief Foreign Exchange Strategist at Scotiabank Canada, pointed out that "the US dollar/Canadian dollar remains below the 1.37 zone and made some progress above 1.36 overnight before falling back. Weak crude oil prices may suppress the rise of the Canadian dollar in the short term. The broader risk background seems positive, although US stock futures have only shown a slight increase so far on the day." "Our fair value estimate for the Canadian dollar continues to change favorably. The factors driving the currency outlook towards a constructive shift in the Canadian dollar should help curb the recent rebound of the US dollar." "The spot losses near the US dollar support level (retracement level and 40 day moving average) at 1.3725 have pushed expected funds down to 1.3675 (returning to 1.3675). The last pullback support level before 6. The Canadian dollar has already given up some of its overnight gains in early trading, but lost support at the low of 1.37, which may result in some additional - perhaps discouraging - gains for the Canadian dollar. The resistance level of USD/CAD is at 1.3750/1375