Dollar in Demand

The US Dollar is holding at highs as we move through the middle of the week. Monday’s better-than-forecast retail sales data, hot on the heels of last week’s bumper inflation reading, has further strengthened the view that the Fed won’t be cutting rates in June. Speaking last night, Fed chairman Powell was heard pouring cold water on near-term easing expectations. Speaking at a US/Canada policy forum, the Fed chief said that the US economy had failed to make further progress on inflation this year.   

Powell Comments

Powell explained that on the back of falling inflation late last year, the Fed had been looking for more confidence on inflation before committing to easing. However, recent data had failed to give the bank that confidence and it has instead become clear that restrictive policy will take longer to work. As such, Powell noted that current policy levels should be maintained for as long as needed.

Fed Easing Expectations

With traders scaling back their Fed easing expectations in response to these comments, the clear risks ahead now are that 1) the Fed cut rates by less than expected this year 2) the Fed holds off from cutting this year. If inflation remains sticky at current levels through the coming months, the first is more likely at this stage. Any shift in Fed outlook pertaining to fewer rate cuts should keep USD supported near-term. However, if inflation remains sticky through the summer, we could see a growing risk that the Fed holds rates steady this year, giving USD further support to rally.

Technical Views

DXY

The rally in the index has seen price breaking out above the 104.95 level, fast approaching a test of the 107.04 level next. With momentum studies bullish, the focus is on a breakout and continuation higher while price holds above 104.95. Below there, 103.48 is next support to note.