US Dollar Outlook:
- The three big events of the week thus far – Fed Chair Powell’s testimony, the release of the December US inflation report (CPI), and Fed Governor Brainard’s testimony – have by-and-large coincided with steep drops in the DXY Index.
- The sell-off by the DXY Index saw price action break through the uptrend from the June, September, and October 2021 swing lows, suggesting the multi-month rally has finished.
- According to the IG Client Sentiment Index, the US Dollar retains a mostly bearish bias in the near-term.
Jobs Recovery, High Inflation in Focus
The second week of January has proved difficult for the US Dollar. An avalanche of comments from Federal Reserve policymakers, in both speeches and testimony on Capitol Hill, has done little to help the greenback ward off a sharp sell-off to the DXY Index’s lowest level since November 10.
Earlier this week, Fed Chair Jerome Powell’s testimony at his nomination hearing coincided with the start of US Dollar selling. Yesterday, the December US inflation report (CPI) provoked the next leg lower by the DXY Index. Today, however, the US Dollar has started to settle near critical support around current Fed Governor and incoming Fed Vice Chair Lael Brainard’s testimony at her nomination hearing.
Much like the remarks issued by Fed Chair Powell, Fed Governor Brainard’s remarks about the state of the US economy were very much of the ‘goldilocks’ variety: optimistic on the pace of the labor market recovery, but concerned about persistently high price pressures. “We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades,” she said earlier today, while also noting that “inflation is too high.”
The fight against inflation has taken a renewed focus in recent remarks by Fed policymakers, with Fed Governor Brainard saying that “getting inflation back down to 2 percent while sustaining a recovery” is the FOMC’s “most important task.”
Both Fed rate hike odds (per Fed funds futures and Eurodollar spreads) and the shape of the US Treasury yield curve (per the 2s5s10s butterfly) suggest that financial markets retain an aggressive interpretation of future Fed policy, presenting a significant disconnect with the broader DXY Index.
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DXY Index Price Technical Analysis: 5-minute Timeframe (January 11-13, 2022) (Chart 1)
The three big events of the week thus far – Fed Chair Powell’s testimony, the release of the December US inflation report (CPI), and Fed Governor Brainard’s testimony – have by-and-large coincided with steep drops in the DXY Index. It’s worth noting, however, despite the market’s long-held belief that Fed Governor Brainard has an aggressively dovish point of view, her focus on corralling inflationary pressures may have helped stem what has been a technically significant breakdown by the DXY Index.
DXY Index Price Technical Analysis: Daily Timeframe (March 2020 to January 2022) (Chart 2)
The sell-off by the DXY Index saw price action break through the uptrend from the June, September, and October 2021 swing lows, suggesting the multi-month rally has finished. But the DXY Index has begun to find support at a familiar area around 94.65/74, where the March 2020 low, September 2020 high, and September to early-November 2021 highs were carved out. A drop below 94.65/74 would hint at further selling pressure in the coming sessions towards 94.20, the 38.2% Fibonacci retracement of the 2017 high/2018 low range.
— Written by Christopher Vecchio, CFA, Senior Strategist