In February, we saw the US Dollar Index (DXY) reject the 100.85 price area to climb strongly to the upside due to several key events
1) Federal Reserve hiked rates to 4.75%.
Although the initial reaction was a big drop to test the low of 100.85, the comments accompanying the rate decision indicated that further rate increases could be expected as inflation has eased but remains elevated.
2) Surprising Non-Farm Payroll (NFP)
A massive surprise to the market with a print of 517K (Forecast: 193K) this signaled that the US economy was still performing strongly, despite the ongoing interest rate increases. The DXY shot up to test the 103.75 price level over the next couple of days following the NFP release.
3) Elevated Consumer Price Index (CPI)
Markets were widely anticipating that US inflation growth should have slowed down from 6.5% to 6.2%. However, the CPI data was released at 6.4%, which indicated a slight slowdown (just not as much as anticipated). This played to the previous narrative from the FOMC that while inflation was easing, it was still elevated. With an increased likelihood that the FOMC would continue with its interest rate hikes, the DXY climbed steadily to the upside, breaking the 103.75 level to climb steadily up to the 105.50 resistance level.
Now as we head into March and the DXY is retracing from the 105.50 price level, where could prices head to?
In the lead up to the major news events, the DXY could continue to retrace lower to retest the 104 price level and support area.
1) Will we see a repeat surprise on the NFP?
It is probably unlikely that we'll get a massive surprise again for the NFP this month. However, any positive data release could see the DXY renew its climb to the upside.
2) Focus is on the CPI
As indicated above, February's CPI was released at 6.4% which was higher than expected. A similar release this month would pretty much cement the Federal Reserve's decision regarding a rate hike, bringing further upside to the DXY.
3) Federal Funds Rate
In the recently released meeting minutes, it was highlighted that while all members supported a 25bps rate hike, some would have supported a decision to raise rates by 50bps.
This shows a level of hawkishness within the FOMC, which could be crucial in the decision this month. Employment and CPI data would be the deciding factor between a 25 or 50bps rate hike.
However, remember that the terminal rate is 5.25% and with rates at 4.75%, we are very close!!
We'll have to pay attention to comments regarding a shift in the terminal rates and increased speculation about a pivot to come from the FOMC.
Based on the points discussed above, I am anticipating overall further upside for the DXY, but
1) Federal Reserve hiked rates to 4.75%.
Although the initial reaction was a big drop to test the low of 100.85, the comments accompanying the rate decision indicated that further rate increases could be expected as inflation has eased but remains elevated.
2) Surprising Non-Farm Payroll (NFP)
A massive surprise to the market with a print of 517K (Forecast: 193K) this signaled that the US economy was still performing strongly, despite the ongoing interest rate increases. The DXY shot up to test the 103.75 price level over the next couple of days following the NFP release.
3) Elevated Consumer Price Index (CPI)
Markets were widely anticipating that US inflation growth should have slowed down from 6.5% to 6.2%. However, the CPI data was released at 6.4%, which indicated a slight slowdown (just not as much as anticipated). This played to the previous narrative from the FOMC that while inflation was easing, it was still elevated. With an increased likelihood that the FOMC would continue with its interest rate hikes, the DXY climbed steadily to the upside, breaking the 103.75 level to climb steadily up to the 105.50 resistance level.
Now as we head into March and the DXY is retracing from the 105.50 price level, where could prices head to?
In the lead up to the major news events, the DXY could continue to retrace lower to retest the 104 price level and support area.
1) Will we see a repeat surprise on the NFP?
It is probably unlikely that we'll get a massive surprise again for the NFP this month. However, any positive data release could see the DXY renew its climb to the upside.
2) Focus is on the CPI
As indicated above, February's CPI was released at 6.4% which was higher than expected. A similar release this month would pretty much cement the Federal Reserve's decision regarding a rate hike, bringing further upside to the DXY.
3) Federal Funds Rate
In the recently released meeting minutes, it was highlighted that while all members supported a 25bps rate hike, some would have supported a decision to raise rates by 50bps.
This shows a level of hawkishness within the FOMC, which could be crucial in the decision this month. Employment and CPI data would be the deciding factor between a 25 or 50bps rate hike.
However, remember that the terminal rate is 5.25% and with rates at 4.75%, we are very close!!
We'll have to pay attention to comments regarding a shift in the terminal rates and increased speculation about a pivot to come from the FOMC.
Based on the points discussed above, I am anticipating overall further upside for the DXY, but
- Price could first retest the 103.75 to 104 support area.
- If the support level holds, this could be a good base for price to rebound and trade back toward the 105.50 resistance area.
- Beyond that, the next resistance level is at 107.
- Alternatively, if the price breaks strongly below 104, then the next support level at 102.60 would come into play.
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