Has the dollar peaked?
We now know that there has been a fundamental shift to raising rates as quickly as possible to get inflation lower. Despite whether the inflation was caused by supply chain disruptions or not. The US dollar is stronger than most other currencies due to its Global Reserve status and the fact that it is subject to a rate hike cycle now. We now need to prepare for the opposite to happen to the consensus but not get contrarian just for the sake of it, as trends can run for a lot longer than anyone can imagine. Yesterday’s low in my opinion is key.
All this week’s focus was on what the FOMC said in their previous meeting so that we could then try and work out what will happen in the coming May meeting. In yesterday's minutes of the 15-16 March FOMC meeting, it was revealed that members "generally agreed" that it would make sense to reduce the Fed's balance sheet by USD 95bn per month (USD 60bn for Treasuries and USD 35bn for mortgage-backed securities), gradually over three months or "modestly longer" if market conditions warrant. This in my opinion is bullish as they will be returning the interest-paying assets back into the US banking, which then gets drip-fed back into the wider economy. This process will allow banks to take on my liabilities and issue more credit, which should also be good for GDP in the long run.
Several participants would have preferred a 50bp rate hike at the March meeting if not for the greater near-term uncertainty caused by the Russia-Ukraine conflict (only St. Louis Fed President James Bullard supported a 50bp hike). Some participants noted that "one or more" rate hikes of 50bp could be appropriate at future meetings, particularly "if inflation pressures remained elevated or intensified."
In the minutes, the committee stated it "is moving towards a neutral stance expeditiously...and perhaps a tighter policy stance could be appropriate." Several Fed officials, including San Francisco Fed President Mary Daly, have called for a 50bp rise at the FOMC's May meeting.
The fact that a Dove like Daily is now calling for a 50bps rate hike means that there is very likely to be a move into the US dollar from lower-yielding assets like the euro or the yen, in what is known as the carry trade.
The H1 US dollar index chart shows that the high from the 5th of April is currently acting as support and that yesterday’s highs were within the hour that included the FOMC meeting minutes data drop. There is a possibility that we come down and sweep below the lows of yesterday, and if so, the target lower would be $98.955. However, my base-case scenario is that we take out yesterday’s highs and move through the levels with $100 insight.
The forex heatmap is showing that the commodity pairs are not doing so well today but the euro and pound are receiving positive flows. This could move the dollar lower as the euro is the largest component of the DXY.
Another thing we must consider is that there will be traders who have been in a long position since the start of the year. There is a chance that they start to take profits as a lot of traders will buy the rumor and sell the news. And we got the news yesterday, it’s just now we must work out if it is already priced in or not.
Assuming it is not the next extension is 2.618 and the 102.55 level. If yesterday’s low holds, this would be my next target to the upside.