DXY Index likely to advance modestly prior to June FOMC meeting, says Scotiabank

The dollar index is expected to advance at a moderate pace before the Federal Open Market Committee’s (FOMC) meeting in June. The Comey testimony didn’t have a material effect as the former FBI Director’s verbal testimony in the open session revealed no new messages.

In the medium term, market concern over US political controversy may resurface as James Comey also testified before the Senate Intelligence Committee in a closed-door session on Thursday afternoon ET. US market sentiment is expected to improve for now.

Meanwhile, US PCE Core Inflation is likely to remain benign in the months ahead given declining private wage growth and sliding oil prices. Fed funds futures contracts have factored in a 96.9 percent chance of a 25 basis points rate rise in June as of Thursday while discounting another 25 bps rate hike with a probability of 19.9 percent and 45.1 percent respectively at September and December FOMC meeting.

"If US political turmoil eases finally, the prospect of a third 25 bps rate hike in September or December will be able to give a much needed but modest boost to the dollar. Although US Treasury Department has pledged to be closely monitoring and combatting unfair currency practices, the appreciation in some currencies such as the KRW, TWD and INR could slow or halt till these USD/AXJ pairs break below their individual critical support levels," Scotiabank commented in its latest research report.