FX Focus: It's all about the dollar at the moment

Friday, 18th June 2021 09:28 - by Rajan Dhall

FX

This week there is only one place to start, the Fed. The FOMC kept rates unchanged as expected but this was a meeting that gave us fireworks. The markets were taken by surprise by the fact that the dot plots pushed forward expectations for a rate hike. The dot plot is where FOMC members put forward estimates for when they believe the Federal Reserve should increase interest rates.

Seven members think that a hike could be appropriate in 2022 (previously 4) and 13 saw 2023 as an appropriate time (previously 7). This led market participants to shift bets that the Fed will hike rates to earlier dates. In an initial reaction, U.S. interest rate futures markets surged and the U.S. dollar strengthened against its major counterparts.

This is a strong reaction but in the short-term could be warranted. If we really look at things, what has changed? Rates are still at very low levels (0-25bps) and the world's central banks are printing money at historical rates. It is very hard to see the Fed tightening to any major degree but of course, anything is possible.

The stock markets have already retraced and pared some of the losses following the event but the dollar strength could persist and throw a spanner in the works. The current rhetoric is that inflation is "transitory" and is the latest shift to a more hawkish tone an admission that it could be here to stay.

Looking at the weekly chart below, the price has now broken through the trendline to move higher. In terms of major resistance zones, the purple zone at the previous wave high could be one to watch. The 0.382% Fibonacci retracement looks very firm as there is a confluence between that and another resistance level there too. From a price action perspective, the trend is still down but a firm double bottom base formation is now forming. A break of 93.43 would make the first higher high higher low since March 2020.

Source: TradingView

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.