– March Fed rate travel contingency sojourn during 100%, but contingency for 4 hikes in 2018 are still subsequent 40%.
– The US Dollar has followed US Treasury rates reduction than it has served as a sidestep opposite transformation in US equity markets.
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Ahead of subsequent week’s FOMC meeting, Fed supports futures are pricing in a 100% possibility of a rate travel – as they have given a start of 2018. It should be no warn afterwards that a instruction of a US Dollar is not fortuitous on a Fed lifting rates though rather what expectations are set for a trail of rate hikes down a line. Currently, rates markets are pricing in additional 25-bps hikes in Jun and November, with a 33% possibility for a fourth rate travel in 2018 by December.
Table 1: Fed Funds Rate Hike Expectations (March 15, 2018)
The biggest source of sensitivity for a US Dollar will come from a updated Summary of Economic projections, a initial expelled during a reign of newly-minted Fed Chair Jerome Powell. At his testimonies to Congress in February, Chair Powell suggested that new developments in a US economy, including a some-more stimulative mercantile process vis-à-vis a Trump taxation cuts, will outcome in both expansion and acceleration expectations being upgraded.
While pronounced developments should be certain for a US Dollar, there has been a sheer undo between a instruction of US Treasury yields and a greenback – aloft yields have not Fed into a stronger currency. Ultimately, a couple between US equity markets and FX markets will infer to be a pivotal driver.
Price Chart 1: DXY Index Daily Timeframe (August 2017 to Mar 2018)
It would mount to reason that given a different attribute between a SP 500, for example, and a US Dollar given a start of 2018, that fears of a faster Fed tightening cycle heading to a selloff in bonds would infer to be a many fruitful drift for US Dollar gains.
With a backdrop as such, USD/JPY seems staid to continue a downtrend given a start of a year while pairs like EUR/USD and GBP/USD should sojourn comparatively rangebound. Similarly, it would seem that a DXY Index might not find a FOMC assembly as a matter it needs to mangle 91.01, a 2017 low that has capped cost movement ever given a mangle on Jan 12 (failed morning doji star candle cluster on Jan 15 to 17 and a bearish pivotal annulment on Mar 1).
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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