US Dollar Rallies Despite Fed Hike Odds Stagnating

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Talking Points:

The US Dollar surge over the previous week has little to do with modifications in market pricing of the Fed’s fee hike timeline.

– 25-bps hikes are being priced-in for September and December 2018, however then no fee transfer is anticipated till no less than June 2019.

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The US Dollar has been on a tear in August, with the DXY Index having gained +2.24% month-to-date. If right this moment was the final day of the month, the DXY can be posting its second greatest month of 2018, and its greatest August since 2008 (+5.67%). Similarly, the dollar is within the midst of its fifth consecutive month of beneficial properties in a row. Needless to say, it’s been a good buying and selling setting for the US Dollar.

Earlier this yr, significantly between March and June, there’s a sturdy case to be made that the US Dollar’s beneficial properties had been largely pushed by the market’s altering notion of the Federal Reserve’s fee hike cycle. Even although the Fed, by way of its Summary of Economic Projections, had been outlining the trail for 3 to 4 fee hikes in 2018, charges markets had been solely pricing in two hikes complete this yr again in March.

Fast ahead to right this moment, and two hikes have been realized, and two extra are due within the coming months. But two extra hikes by way of the top of the yr have been priced in because the Fed’s June assembly: per week after the June assembly, markets had been pricing in a 90% likelihood of a 25-bps hike in September; right this moment, they’re pricing a 92% likelihood.

Federal Reserve Rate Hike Expectations (August 16, 2018) (Table 1)

Central Bank Weekly: US Dollar Rallies Despite Fed Hike Odds Stagnating

It stands to purpose, then, that whereas the US Dollar rally by way of August has been spectacular, it hasn’t been for the standard causes. There is sweet purpose to imagine that, with out the US-China trade war or the Turkish Lira collapse, we wouldn’t be witnessing the shape or style of US Dollar strength that has materialized to this point.

Ultimately, this leaves the US Dollar’s basic flank uncovered shifting ahead. Without the Turkish Lira implosion and its speculative knock-on impact to the Euro – which is 57.6% of the DXY Index –the DXY breakout wouldn’t have materialized prior to now week. With two hikes already priced in for the remainder of the yr, this can be ‘as good as it gets’ for the buck. The basic backdrop for the US Dollar is robust now, but it surely doesn’t seem to be situations can get any higher.

DXY Index Price Chart: Daily Timeframe (June 2017 to August 2018) (Chart 1)

Central Bank Weekly: US Dollar Rallies Despite Fed Hike Odds Stagnating

As lengthy because the Turkish Lira disaster is ongoing and the US-China commerce warfare continues, the elemental drivers which have carried the dollar to its 2018 excessive yesterday stay in place. The technical construction of the DXY Index is stil bullish, as value continues to carry above its each day 8-, 13-, and 21-EMA envelope. Similarly, each daily MACD and Slow Stochastics are issuing bullish momentum alerts. Through the top of the month, the each day 13-EMA ought to be watched for help, which value hasn’t closed below in August.

Read extra:US Dollar Pullback Driven by Chinese Yuan, Turkish Lira Strength

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail [email protected]

Follow him on Twitter at @CVecchioFX



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