The US dollar jumped on Monday, but further gains may be difficult, especially against major European currencies, according to Bank of America, which noted increasing signals from quantitative analysis indicating impending pain following Federal Reserve Chairman Jerome Powell's dovish remarks at the recent Jackson Hole seminar.
The US dollar index, which measures the dollar's strength against a basket of six major currencies, rose by 0.6% to 98.2050.
Strategists at Bank of America noted in a recent memo: "Signals of a continued bearish trend for the US dollar have widened, and position analysis is negative for the US dollar against the euro/dollar, the pound/dollar, the Swiss franc/dollar, and the Swedish krona/dollar." This shift reflects growing doubts about the strength of the dollar as investors recalibrate their expectations amid changing economic conditions and monetary policy outlooks.
This comes as Powell hinted at the possibility of monetary easing in the near future as the balance of risks shifts from high inflation to a decline in the labor market.
Powell stated in his remarks at Jackson Hole on August 22: "With policy in a restrictive area, the baseline outlook and the shift in the balance of risks may require an adjustment in our policy stance."
This shift from Powell negatively impacted the dollar, prompting technical indicators and position indicators to favor European currencies.
The British pound, the Swedish krona, and the Norwegian krone are likely to benefit from pressure on the dollar, according to Bank of America's Cross-Asset Regime Switching (CARS) model, which showed positive signals for these European currencies against the dollar.
But it is not only European currencies that are likely to benefit from a weak dollar. Emerging market currencies such as the Mexican peso, Brazilian real, and South African rand also offer gains against the dollar, in line with the broader trend, the strategists added.
Powell's remarks at Jackson Hole provided an important signal towards monetary easing, leading to a shift in sentiment against the dollar in European markets. As markets absorb these signals, the interaction of quantitative models, technical levels, and Federal Reserve guidance points to a more cautious path for the dollar in the coming months.$ETH
