FxWirePro: DXY rebounds at 61.8% Fibos as Fed likely to continue hiking cycle but market focuses on driving forces for long-run

The US dollar index futures for near month tenors has risen above 93.800 mark ahead of today’s Fed’s funds rate. If you observe monthly plotting of DXY technical chart, 2017 has shown the constant slumps especially after bearish engulfing, the dollar downtrend hit multi-month lows below EMAs and retraced 61.8% Fibonacci levels. But at this juncture, the bulls have resumed the rallies bouncing above EMAs since last February, while both leading (RSI and stochastic curves) are substantiating this bullish stance.

A Fed rate hike at the end of today’s meeting is seen as widely anticipated. However, market attention mainly focusses on the longer term Fed outlook provided in its recent announcement and presented by Fed chairman Jay Powell in the following press conference.

There are developments that could very easily distract the rate hike cycle in its current autopilot mode, such as the risk of a trade war or the results of the tax reform. What is decisive for the dollar is how the Fed evaluates the risks resulting from this. For the time being neither inflation nor inflation expectations or real economic data reflect any effects whatsoever.

However, if the Fed sees a real economic risk of excessive inflation levels the market would have to price in a more aggressive rate hike cycle which would benefit the dollar. In the absence of such a revaluation, the market will stick to its current point of view that the rate hike cycle will slow as early as next year once the neutral interest rate, which the FOMC members consider to be located in the area around 2.3-3.5%, approaches.

And in fact, it is likely that market interests will focus on the considerations on neutral interest rate levels. The more likely a slowing of the Fed rate hike cycle becomes, the more the tightening signals expected from the ECB tomorrow are likely to be reflected in the EURUSD exchange rate.

And the more worthwhile it may seem to investors to reallocate from US dollar into euro so as to be ahead of the curve if one expects the normalisation in the eurozone to take place along similar lines as in the US, where the USD started appreciating approximately half a year before the end of the asset purchases in expectation of imminent rate hikes.

In aggregate, the broad dollar is still expected to grind a modest 2.5% lower from current levels over the next four quarters (3.9% vs the DXY basket) but is now no longer forecasted to print fresh cycle lows. 

For active delta-hedgers, the current tightness of the USDNOK – EURUSD risk-reversal spread sets up good entry levels into a convex RV (refer 2nd chart) that has a solid track record of performing through the EU debt crisis years even when EURUSD was the epicenter of the crisis. Courtesy: JPM, Commerzbank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 90 levels (which is bullish). Hourly USD spot index was at shy above 97 (bullish), while articulating (at 08:46 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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