Bearish Bets Increase After Fed’s Hawkish Pause

US Dollar, DXY Index – Outlook:

• The Fed kept rates on hold, but expected two more rate hikes in 2023 and no cuts until 2025.
• But the market is pricing in another possibility interest rate hike A rate cut this year, and possibly as early as next year.
• what does this mean USD?

The US Dollar Index (DXY Index) has fallen below key support, suggesting that the market appears to be at odds with the hawkish view of the US Federal Reserve (Fed).

The Fed kept rates on hold at its meeting last week, bringing an unexpected hawkish surprise of forecasting two more rate hikes in 2023 given the disappointingly slow fall in inflation. The economy’s resilience to de-risking from tighter financial conditions, raising the US debt ceiling and stress in the banking sector may also have contributed to the hawkish guidance.

The Fed’s dot plot suggests two more rate hikes by the end of the year, but the market is pricing in a less than 100% chance of one rate hike this year, with rate cuts starting as early as next year. be. Fed Chairman Powell, by contrast, said he would not consider cutting rates until inflation fell significantly and meaningfully, which could take years.

US Dollar Index (DXY) Daily Chart

Chart created by Manish Jaradi using TradingView; Notes at the bottom of the page

The market’s dovish pricing appears to be based on the perception that the Fed’s inflation forecast lags behind actual inflation, with producer price inflation and import prices already signaling softening economic activity. . Fed officials have revised up their economic growth forecasts for 2023 and expect inflation to slow. The core PCE price index is expected to fall to 3.9% by the end of 2023 from 4.7% now, compared with 3.6% y/y in March.

DXY index weekly chart

Chart created by Manish Jaradi using TradingView

Technical charts confirmed that month-long upward pressure has eased as the DXY index fell below the critical support of early June lows of 103.40. The index is expected to head towards its April low of 100.80.

From a trend perspective, the USD has been on a downward trend since the beginning of 2023, as shown by the daily chart color-coded based on trend/momentum indicators. This will be further enhanced by the low-high-low-low sequence from late 2022 onwards. Below 100.80, the next support can be seen at the 200-week moving average (currently around 98.20). Unless the index manages to break the hard hurdle of March’s high of 105.90, the path of least resistance is from flat to weaker dollar.

Note: The color-coded charts above are based on trend/momentum indicators to minimize subjective bias in trend identification. This is an attempt to separate bullish and bearish phases as well as consolidation within the trend and trend reversals. A blue candlestick represents a bullish stage. A red candlestick represents a bearish stage. Gray candlesticks act as a consolidation stage (within a bullish or bearish stage), but they also tend to form at the end of a trend. Candle colors are not predictive, they simply indicate current trends. In fact, the candle color can change on the next bar. False patterns can occur around 200-period moving averages, around support/resistance, and/or in flat/volatile markets. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Information users use the information at their own risk.

— By DailyFX.com Strategist Manish Jaradi

— Contact and follow Jaradi on Twitter: @JaradiManish