In an article we looked at the US Dollar Index (DXY) and expected a rally as the Market had parred back rate hikes by too much but that has all changed with the market expecting a 75bps hike so is the dollar a sell on the expected hike or does it have more upside?
Is the USD a Sell On An Expected Rate Hike?
Markets have rushed to rapidly price in a 75bp rate hike by the Fed tomorrow, now attaching a nearly 100% implied probability of this event coming to fruition.
The market-implied terminal rate for mid-2023 is now some 10-15bp above 4.0%, having risen around 70bp since last Thursday (before the US CPI report). Will they raise by 0.75 bps they probably will…
Respected Wall Street journalist Nick Timiraos published a new story on a possible 75 bps hike The Fed has been known to communicate with markets during pre-FOMC meeting silent periods and this article looks like the FEDs intentions have been made clear.
It is thus highly likely that the author’s potential sources have given him a hint about the outcome of tomorrow’s Fed decision.
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Rate markets are prepared for such a message but stock markets could have more downside.
Higher USD rates and more risk-off will boost the USD, which could have more upside against the other G10 currencies.
On an expected event, the direction of the USD will depend on stocks if they can hold up the USD will correct but if they fall the USD should appreciate.
The USD is a long-term up trend so any dips will be buying opportunities.
“Global stock markets diverged on Tuesday after a worldwide sell-off in the previous session, as analysts assessed the longevity of the bear market and risk of recession.” (CNBC)
Not only are the FED raising rates, but the global economy is also slowing and we face the possibility of a recession which is bullish for the USD and so to is the fact they are reducing their balance sheet and taking USDs out of circulation.
Technical Analysis
On the weekly chart the USD has broken 104.00 and this is first level support – if we were to break below the level we would look to buy it back above the level and have a stop behind the 103.00 level as per the daily chart. Longer term we expect the DXY to trade to 110.00 then 120.00
