The USD And FOMC’s Interest-Rate Call

Exactly a week ago, we highlighted some of the fundamental and technical signs that EUR/USD’s 16-month uptrend was finally coming to an end.

While we were focused on developments on the East side of the Atlantic last week (including the ECB meeting), the market’s focus is shifting westwards this week, with the May Federal Reserve meeting set to conclude tomorrow and the always-impactful Non-Farm Payrolls report on Friday. Accordingly, we’re focusing on the outlook for the US dollar index (DXY) today.…and what a run it’s had!

The index has surged by 300 pips in the last two weeks, bringing the most-followed measure of dollar strength back into positive territory for the year. As of writing, DXY is approaching its year-to-date high, and a key previous support/resistance level, at 92.60. After such a strong run in such a short period of time, we wouldn’t be surprised to see dollar bulls take some profits around that barrier.

Daily USD

M. Weller On USD

The market’s expectations for tomorrow’s Fed meeting are, once again, near unanimous (score another for Bernanke’s “communication as a policy tool”!). Futures traders are pricing in just a 5% probability of a rate hike tomorrow, according to the CME’s FedWatch tool. That said, the central bank will likely reinforce the perception that it plans to raise rates at its meeting next month, a development that has already been 100% priced in by the market. In other words, traders have completely discounted a rate hike in the Fed’s June meeting, so even a hawkish statement may not be enough to drive the greenback higher.

Indeed, Friday’s Nonfarm Payrolls report is likely to upstage the Fed’s meeting in terms of market impact. Recall that last month, the US economy saw disappointing job creation of just 103k new jobs, though this weak reading was partially offset by an uptick in average hourly earnings to +0.3% m/m. With the economy running at near “full employment” across a variety of different measures, the average hourly earnings measure will likely be more significant than the headline number of jobs created.

If this figure dips below the 0.2% m/m reading expected by economists, it could tilt the odds toward the “two more interest rate increases this year” camp. If that scenario develops, it could prompt dollar bulls to take profits and take DXY back toward previous resistance-turned-support near 91.00. Conversely, a strong wage reading could boost traders’ confidence that the Fed will look to hike rates another three times this year, potentially taking the dollar index to new 2018 highs above 92.60.

Daily USD

Source: TradingView, Faraday Research

One thing is certain: after a quiet couple of months, the dollar index is getting much more interesting as we head into May!

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