Dollar Rally Pause: What to Expect in the Near Future

The dollar is attempting to consolidate its gains on Monday after breaking above the upper bound of a key bearish channel:In the search for bullish entry points, attention should be paid to the same upper channel bound, which now has a high chance of acting as a support line. On the chart, this corresponds to approximately the 103.5 level on the dollar index. The development of an upward trend in the coming month seems to be the more likely scenario in my view, given that last week on lower timeframes, there was a battle to maintain trading within the channel (breakouts and subsequent pullbacks), which enhances the significance of this line as an important market reference point.Powell spoke at last week's Jackson Hole Symposium. Central bank heads generally deliver insightful remarks at this symposium, and this time was no exception. The market was overall satisfied with how the Fed chair tried to strike a balance between risks and the necessity for hawkish policy. This is evident from the positive closing of major indices on Friday, which, by inertia, passed on risk appetite to Monday's trading. The Federal Reserve Chairman once again did not rule out further tightening and indicated, that in the context of inflation forecasts, investors should keep an eye on the labor market. It was a fairly clear statement that the central bank will be waiting for weak labor market indicators before hitting the pause button. Additionally, the Fed Chairman stated that officials are currently concerned about inflation in the non-housing services sector, which aligns with his previous remarks on the labor market, as labor is a more significant factor of production in the services sector than capital. Wage growth in this sector currently has a faster pace compared to the production sector, which underlies the primary inflation risks. In short, the slowing pace of job growth in the services sector and clear signs of inflation deceleration in non-housing services are what Powell recommended watching in upcoming labor and inflation reports.The U.S. Treasury bond market reacted unusually to Powell's speech, with short-term bond yields rising while long-term bond yields remained steady or even slightly declined:This suggests that the chances of near-term tightening have increased, while in the more distant future, the market has begun to anticipate a slightly faster inflation easing.China rolled out new stimulus measures today, which also boosted risk appetite in markets, initially in China and then in financial markets beyond China.Overall, the lack of major market events and reports in the first half of the week favors the development of the bullish rebound in equities and the pullback in the dollar against other major currencies.In the second half of the week, markets expect the Core PCE for July, which, despite it now being August, has the potential to surprise, as it did in June and July. On Thursday, the focus will be on the NFP report, as mentioned earlier, with an emphasis on employment in the services sector and, consequently, wage growth in it. For the EU, the market awaits inflation data for August as well as labor market statistics for Germany. Also on Wednesday, China will release the official Manufacturing PMI and considering that China remains on the market's radar after a series of recent negative news, a significant deviation from the forecast could also impact risk appetite in external markets.