The Fed is forced to balance a lot of competing forces when it meets today.
The Fed is forced to balance a lot of competing forces when it meets today. Tighter monetary policy is certainly warranted due to record high US inflation and buoyant US economy. The recent slide in equity markets and the rise in geopolitical tensions related to the Ukraine, however, combined with the backdrop of still ongoing concerns about COVID-19, doesn’t make its job easier.
What do we expect from today’s meeting? In short, the Fed has already provided a lot of guidance on what it expects next in recent months. Broadly, speaking the consensus by economist and what has on average been priced in by markets is: 1) four 25 bps hikes in 2022 starting in March; 2) the end of asset purchases by mid-March; and 3) the start of balance sheet reduction from mid-year, most likely September.
Today’s meeting comes without projections, so it is down to what the Fed says both in its statement and press conference. For the Fed to be marginally more hawkish, the only probable path would for them to announce the immediate end to asset purchases, which would open the door for earlier balance sheet reduction.
That outcome seems more sensible than the Fed raising rates today, Fed giving indications of a 50bps hike at the end of each quarter, or raising interest rates at interim meetings, albeit all options are still on the table.
In terms of the size of balance sheet reduction, anything hinting at over $75-100bn a month would also likely be interpreted as hawkish by the market.
DXY Daily Chart
Now back to the original question, is the US dollar Fed up? Possibly, but the basically technical setup of the DXY is far from bearish. The index is trading well enough above the 200-day exponential moving average, has recently bounced off the 61.8% Fibonacci retracement from its move up from its October low and November high and the daily RSI is above 50.
DXY vs US Dollar Positioning
Likewise, although it is true US dollar positioning is somewhat stretch and some of the recent DXY boost is related to Ukraine and its status as a safe-haven, there is still capacity in the market to add further dollars in net-long. In summary, trading the DXY ahead of the Fed meeting is risky business. Better to see how things play out post the meeting. If price tests and fails the 96.92-96.40 region, that may be a better indication that the DXY is truly fed up with the direction of US monetary policy.
Start Trading and Monetize your Knowledge
DISCLAIMER: All communication, messages, media and links distributed on this channel has been prepared by VARIANSE solely for information purposes without regard to any particular user’s investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but VARIANSE does not represent that it is accurate or complete. VARIANSE does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sales of any financial instrument. The information contained herein has no regard to the specific investment objects, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment decision. It is important to note that past performance is not indicative of future results. VARIANSE is a trading name of VDX Derivatives, authorised and regulated by the Financial Services Commission (FSC) of Mauritius. FSC license number C118023323. VARIANSE is also a trading name of VDX Limited and is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom. FCA register number 802012. This publication is not directed to residents of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.