Dollar Bulls Cheer, FOMC Rate Cuts Are No Guarantee

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Dollar Bulls Cheer, FOMC Rate Cuts Are No Guarantee

Jerome Powell Not So Dovish

Jerome Powell’s comments at the Jackson Hole Federal Reserve Symposium failed to match the market’s expectations. The market is counting in an aggressive rate-cutting cycle and that is just not what the Fed is looking at. The remarks, the opening speech for the Symposium, cite mounting global worries, the impacts of the trade war, and the Fed’s willingness to support the economy. Powell also cites healthy domestic economic conditions. In his words, the Fed’s job is to sustain the expansion. When you read between the lines he’s saying there’s not a recession in sight, there are some risks, the FOMC is ready, but we aren’t cutting rates much more if at all.

The July cut has been called a mid-cycle adjustment more than once. The trajectory of rates remains positive, the July cut was a recalibration to correct for a “one cut too many” situation that has developed due to trade. Powell also voiced the Fed’s independence saying it was not responsible for creating policy ie trade, it’s job is to compensate for conditions once those top-level decision had been made. Bottom line, the Fed isn’t that dovish, certainly not as dovish as the THREE rate cuts the Fed Funds Futures are pricing in.

The Dollar Index quickly gave up some ground when the speech details were released. That said, the index also quickly found its footing and not much lower that it was to start. The daily chart itself is a mixed-bag of indications, the longer-term trend is still sideways and rangebound while the near-term bias is definitely bullish. In fact, the last 2-3 week’s of candles looks like a snappy double-bottom at $97.50 followed by a quick rally. The rally is now consolidating in a possible-flag pattern that, if confirmed, will lead the index up to a new high. Why? Because the FOMC isn’t as dovish as expected, the U.S. economy is still stable and growing, and the rest of the world’s central bankers are about to do stimulus.

The EUR/USD is perhaps the most vulnerable currency at this time. Not only is it faced with slowing economic growth there is a contentious Brexit at hand and mounting indication the ECB will ease. What makes the situation worse for euro bulls is that easing in the EU will come at two levels, at the Federal EU level and at the local level. Countries like Germany have also made it clear they will support their local economies and that will further weaken the EUR versus the USD. The EUR/USD is sitting on support right now, support is at the 1.1050 level, a move below there would be very bearish (bullish for the dollar). My target in that scenario is 1.0800.

Dollar-Bull

What is a Dollar Bull?

A dollar-bull is an investor who is optimistic about the value of the U.S. dollar (USD) and expects it to appreciate versus other major currencies.

Key Takeaways

  • A dollar-bull is an investor who is optimistic about the value of the U.S. dollar (USD) and expects it to appreciate versus other major currencies.
  • Some investors are perpetual dollar-bulls, in that they hold the general view that it is sheer folly to bet in the long term against the U.S. economy and, by extension, the U.S. dollar.
  • Dollar-bulls consider many factors, such as the economy, debt-to-spending ratio, market surplus, global commodity prices, and the geopolitical climate as a whole, to account for their view for both the dollar and the corresponding currency in the currency pair.

Understanding Dollar-Bulls

Not to be confused with a dollar bill, a dollar-bull is a forex trader, or speculator, who expects the U.S. dollar to rise in value with respect to the major currencies over time and will position their trades, or investment portfolios, to reflect this view. Their actions will even tend to support and strengthen the currency. Some investors are perpetual dollar-bulls, in that they hold the general view that it is sheer folly to bet in the long term against the U.S. economy and, by extension, the U.S. dollar. They might not know exactly which currency the dollar will outperform against, but they are firm in their view that it will exceed expectations.

Dollar-bulls consider many factors to account for their view for both the dollar and the corresponding currency in the currency pair. These factors may include the economy, debt-to-spending ratio, market surplus, global commodity prices, and the geopolitical climate as a whole and their impact on both nations.

US Dollar bulls wake up post-FOMC Minutes

The US Dollar Index (DXY) is trading at $89.59 on Tuesday as the FOMC Minutes’ report released in April is quite hawkish and supportive for the US Dollar.

The FOMC says that they all agree that gradual rates hikes are appropriate while the economic outlook has strengthened in recent months.

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Additionally, on the Personal Consumption Expenditure (PCE), favorite gauge of inflation by the Fed the report says “recent readings on key factors that influence consumer spending—including gains in employment and real disposable personal income, along with households’ elevated net worth—continued to be supportive of solid real PCE growth in the near term,” which is rather hawkish.

On the tax reform, the minutes say: “the lower tax withholding resulting from the tax cuts enacted late last year, which was beginning to show through in consumers’ paychecks, would likely provide some impetus to spending in coming months.”

Meanwhile, earlier in the day, the Core Consumer Price Index (CPI) year-on-year in March matched analysts expectations at 2.1% increasing 0.3% from February readings at 1.8%. The Fed will be more likely to hike three times this year as its 2% target has been reached and even surpassed. The lower readings in the recent CPI were due to cell phone data pricing. The weak US Dollar should also help inflation to pick up in the coming months. The skill shortages increase in the job market should support the wage growth, according to James Smith, an economist at ING.

“The inflation number was Fed-friendly and should have been dollar-positive. But today is really about the geopolitical story. There’s a bit of a flight to haven assets and Treasury prices are rallying too,” said Minh Trang, senior FX trader at Silicon Valley Bank.

The geopolitical context is one of the main market drivers. President Trump said to Moscow to “get ready” for an airstrike on Syria. Meanwhile, in Saudia Arabia, a ballistic missile was intercepted by the Saudi’s air defense. Yemen’s Houthis sent a missile attack in retaliation of “air raids by a Saudi-led coalition fighting the Iran-aligned armed movement.” According to Reuters.

US Dollar Index: 4-hour chart

Immediate support is at $89.35 while further down, support lies at 88.94 swing low and at 88.25 cyclical low. Resistances are seen at the $90 mark and $90.59 swing high.

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