US Dollar and DXY Analysis:
- USD[1] Fundamentals look supportive ahead of FOMC[2] - safe-haven and liquidity
- Dollar Index[3] (DXY) positioning only slightly lighter after sizeable dollar sell-off
- Key DXY technical levels ahead of the FOMC meeting and presser
US Dollar Fundamentals: USD Supported Ahead of FOMC Meeting
The US dollar has experienced a ‘V-shaped’ recovery after the dollar sell-off when CPI[4] reached 7% - the hottest US inflation print in nearly 40 years. The drop has been viewed by many as the result of a bullish disappointment as expectations of a surging dollar dropped sharply.
Currently, the dollar, via proxy (US Dollar Index - DXY), trades above levels witnessed before the sell-off, leaving the door open for more bullish disappointment. However, the dollar looks to be supported by the recent Russia-US tensions over Ukraine due to its safe haven[5] appeal and liquidity. Additionally, oil[6] continues to trade close to its recent high which has the effect of stoking inflation expectations and, by extension, fosters a greater pace of rate hikes from the Fed with the possibility of initiating quantitative tightening (QT) sooner than originally expected.
FOMC Preview:
The pace of rate hikes and end date of quantitative easing have often been points of interest in previous meetings however, the focus of today’s meeting may be skewed more towards the start date of QT, the process whereby the Federal Reserve Bank reduces its balance sheet and effectively tightens financial conditions.
Earlier this month Mary Daly (San Francisco Fed[7] President) alluded to a faster rate of QT by saying that she “would prefer to adjust the policy rate gradually and move into balance-sheet reductions earlier than we did in the last cycle.”
