USD Off Highs Ahead of FOMC
Ahead of the conclusion of the Fed’s two-day FOMC meeting later, the question traders are grappling with is whether the Dollar has room to run higher here? The Dollar Index is around 12% higher on the year, sitting just off the highs printed earlier in the month. Much of the recent correction was fuelled by two Fed members pushing back against the idea of a larger 1% hike on the back of record inflation in June. Following the larger-than-signalled .75% hike in June, traders began adjusting their rates view higher for this month until those comments from Waller and Bullard.
The reaction to those comments shows just how elevated USD upside positioning has become as well as the sensitivity in markets as traders seek to gauge when the Fed is likely to begin slowing the pace of hikes or even pausing tightening altogether. That time might soon be approaching.
Consumer Confidence Drops in June
The latest data yesterday showed consumer confidence cratering once again last month. With inflation soaring and financial conditions tightening, fears of a slowdown are growing. We’ve also seen a slew of big US companies issuing profit warnings and or undershooting earnings forecasts. Walmart downgrading its profit outlook yesterday has been viewed as a clear warning sign over recession risks.
Traders will therefore be paying close attention to the Fed’s outlook and forward guidance today. Regardless of whether the Fed opts for a .75% or 1% hike, the larger market impact is likely to come from its comments around growth concerns and recession fears.
Recession Fears in Focus
If the Fed is seen sounding more alarmed over economic conditions and the growth outlook, this might well fuel a reduction in traders rate projections over the rest of the year. In particular, any signal that the Fed is willing to reduce the size of its rate increases from September would likely weigh heavily on USD near-term. Indeed, USD has fallen following six of the last eight Fed rate hikes, raising downside risks for the Dollar into today’s meeting.
Technical Views
Dollar Index
DXY has been moving higher within a broad bullish channel this year. However, recent peaks have seen plenty of bearish divergence on momentum studies, raising reversal risks. Price is currently being underpinned by a bullish trend line within the channel. If 105.70 breaks, this might be the signifier for a deeper move towards 104.03 initially. Topside, 108.77 is the level for bulls to break.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.