- DXY tests lower to 97 the figure.
- Fed bias perceived to be leaning with a dovish bias.
- Will the ECB save the day for dollar bulls?
The greenback is losing its edge this week following a top on the 98 handle and has fallen all the way back to 097 the figure. The move was initially put down to the market’s reaction to heightened trade and global economic contraction risks following Trump’s announcement that his administration was on the brink of slapping on surprise tariffs on all Mexican imports.
The herd ran to safe havens which sent U.S. yields plummeting which ultimately weighed on the greenback. Then, the notion that the Federal Reserve was switch to an easing bias and ultimately cut interest rates later in H2 weighed into the downside as well.
This theme was massaged earlier in the week by James Bullard, a voting FOMC member, who’s uber-dovish rhetoric hammered down the nail in the coffin for the dollar – saying that he did not want to prejudge the outcome of the June Fed meeting, but noted that the global trade narrative has darkened – Adding, with inflation running under the Fed’s targets, and the inversion of the Treasury yield curve, the Fed’s current rate may be too high, and in need of a rate cut ‘soon’.
Fed member key comments:
- Bullard: Yield curve and inflation expectations are sending the signal that current policy is too tight.
- Bullard: A recent visit to Hong Kong left me more pessimistic that a trade deal with China will get done soon.
- Bullard: Expects trade uncertainty to last for the foreseeable future.
Then, Fed’s Powell has been reiterating today that the Fed wants to be data dependent. However, markets are of the mind that conditions are likely to continue to weaken due to trade or other issues. as such, it appears that markets are trying to front run the Fed considering Powell has warned that there would be a subsequent towards lower interest rates in the future.
- Fed’s Powell says with economy growing, unemployment low, inflation low and stable, it’s right time to rethink long-run strategies.
- Powell sees much higher likelihood rates will fall to effective lower bound in a downturn.
- Powell says Fed takes seriously the risk that persistent inflation shortfalls could reduce inflation expectations.
- Powell says ‘dot-plot’ of Fed rate forecasts has distracted attention from how Fed will react to unexpected events.
- Powell says in times of uncertainty, median Fed rate forecast might best be thought of as ‘least unlikely’ outcome.
The combination of those cmments, along with Clarida speaking also, have cemented a message to markets that there is a likelihood that the Fed is on course to shift to a dovish bias as the way things stand against the global economic and geopolitical backdrop.
However, given the percentage of what the euro plays in the basket of the DXY, this week’s ECB could be a pleasant reminder for the less committed DXY bulls which may encourage them to hold in there. The ECB is still in negative territory and having turned dovish again in March, the market will be carefully watching for the policymaker’s bearishness on the global and domestic economy.
“There is risk that the ECB may not be as dovish as the market is expecting. While this could lift the EUR in the short turn, the negative implications for Eurozone growth are likely to cloud the outlook for the EUR in the medium-term term and limit upside potential for EUR/USD into 2020 and beyond. We expect the USD to win back some ground vs. the EUR in the near-term. “
Analysts at Rabobank explained.
DXY levels
The DXY was down to a fresh low at 97 the figure in recent trade and has completed a 50% Fib retracement of the March-May swing low/highs, meeting the mid-May low. The ATR has run higher and on a continuation of the downside, the mid-April lows could come quickly into play in the 96.70s which has a confluence of the 61.8% Fibo. However, 4HR stochastics are now in oversold territory which brings in the 7th March highs and 50% mean reversion at 97.70 as an upside target.
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