Talking Points:

– The DXY Index is quickly approaching breakout territory after having traded in a sideways congestion over the past six weeks.

– Unless trade war concerns flare up again, there’s nothing meaningful on the calendar until Friday’s July US Consumer Price Index that is of material interest to the US Dollar.

– Retail traders are have faded both EUR/USD and GBP/USD losses, leading the IG Client Sentiment Index to a bullish outlook for the US Dollar.

The US Dollar (via the DXY Index) is approaching the topside of its recent near two-month consolidation, and Monday’s price action was another step forward towards a bullish breakout materializing in the sessions ahead.

There is very little by way of US economic data before Friday that will prove to be a significant hurdle for the US Dollar; the only ‘high’ rated event comes on Friday in the form of the July US Consumer Price Index. With price pressures running high at +2.9% y/y in June and due to having remained at the same level in July, there is little doubt the Federal Reserve will tighten policy again when it meets in September.

After all, as the July US Nonfarm Payrolls report showed us last Friday, US Average Hourly Earnings are coming in at +2.7% y/y, meaning that real wage growth is negative. If this is the start of a new trend, which it very well could be, it will only incentivize the Fed to hike rates twice more this year.

Currently, Fed funds futures are pricing in a 90% chance of a 25-bps rate hike in September and a 65% chance of a hike in December. A week ago, odds were closer to 80% and 60% for September and December, respectively.

While there has been little movement around the US Dollar on the news front today – on either of the two big issues, the Fed or the trade war with China – there has been a bit of negativity abroad helping boost demand for the greenback.

Brexit concerns are rearing their ugly head once again, and now that the British Pound has been sapped of rate hike expectations following the Bank of England’s one-and-done hike last Thursday, the floor is more or less falling out for Cable. Meanwhile, the Euro continues to face pressure after a weak June German Factory Orders report this morning, but as we examined in the weekly trading forecast, there is very little on the calendar for the Euro to look to for a lifeline to stop its recent skid.