The US Dollar has started the week on a softer footing against a broad basket of its main trading partners. While the greenback is currently holding just below the year’s highs, the question is: on the back of the Fed’s tapering announcement last week and a better-than-expected October NFP, why is the Dollar not much higher than it is?
Fed Announces Cautious Taper
Considering the Fed tapering announcement first then. The key thing here is that the move was widely signalled and well expected, meaning that it was priced in. While there was some divergence in views over the scale of tapering, given that the market was broadly expecting the Fed to announce tapering, it seems something of a classic case of “buy the rumour, sell the news”.
Powell Pushes Back Against Rate Hikes
Looking at the breakdown of the meeting and the announcement, the $15 billion per month level was well within the market’s forecasts and represents a gradual pace scheduled to conclude around the middle of 2022. While the Fed added that caveat that the pace of tapering can be adjusted (two way risk), Powell’s push back against rate hikes is what really diluted the announcement. Powell warned that the end of tapering would not necessarily herald the start of rate hikes and noted that the Fed has room to be patient when it comes to hiking rates.
Inflation Spike To Pass
Expanding further on the rates comments, Powell noted that while inflation has developed above forecast over recent months, price pressures are not forecast to last, as supply-side issues are expected to wane. Additionally, Powell noted that the chances of a wage-price induced inflationary spiral were low, leading into his next point.
Employment Still Subdued
The Fed is still not happy with the level of employment in the US economy, noting that there is still slack within the labour market. Regarding labour shortages, Powell expected these issues to subside as supply issues resolve and should then facilitate an increase in employment, which the Fed is looking to see before moving on rates (hikes won’t be based on inflation alone).
Lacklustre October Jobs Data
Given the details of the Fed’s decision and outlook then, we can see why Friday’s data did little to inspire a further USD rally. While jobs growth was seen, at around 0.5 million on the month, growth is slick lacklustre and with average hourly earnings falling back, this further endorses the Fed’s comments regarding the low risk of a wage-price inflation spiral.
US CPI Up Next
Looking ahead this week then, the focus will be on US CPI due on Wednesday. Given the current USD reaction to recent data it will likely take a strong beat to see any material shift higher in USD. On the other hand, a consensus reading or a weaker-than-expected reading will likely see USD unwind a little further.
Technical Views
DXY
The Dollar Index has been moving higher within a broad bullish channel over recent months. However, bearish divergence has been creeping in on momentum studies over the most recent ascent. With this in mind, while the 94.30 level holds as resistance, there are risks of a downside reversal with a break of the 93.71 level (and channel low) putting the focus on 93.02 next.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.