Dollar might find support, if 10 year break-even inflation crosses 1.6%

Dollar could find some support if US break even inflation for 10 year, crossed key resistance around 1.6%. Dollar in recent days have shown significant weakness, despite FED being the most hawkish central bank among its developed market peers.

The reasons behind Dollar’s weakness are 

• Even though the FED is most hawkish, its rate rises are not playing out as intended. Last year FED was able to deliver just one hike, much lower than initial expectations of three to four. This year market is playing relatively conservative and expects FED to hike just once. Without more than two hikes, yield difference may not be enough to provide support to Dollar.
• ECB signaling lesser possibility to further actions, Dollar can rely less on other economies to provide support.
• Moreover, investors now expect inflation to return globally, not to be an US specific phenomenon.

So, it is likely to be inflation expectation that might provide support to Dollar.

Inflation expectations have risen recently quite sharply in US, from 1.18% in early February to as high as 1.53% in early March, however it is still below key area of 1.6% and breaking above would push it towards 2%, FED’s medium term target.

Oil is likely to keep playing key ingredient behind expectations.