Dollar Rally Fueled by Fed’s Hawkish Shift
The US dollar has climbed to a 13-month high, with the Dollar Index (DXY) pushing past 107.50. This move is a direct reaction to the Federal Reserve’s recent dot plot, which showed a significant hawkish shift, lifting the median rate projection for year-end. The market is pricing in the Fed’s tough stance on inflation.Energy Prices and Euro Outlook Create Divergence
However, we see a disconnect between this hawkishness and the sharp drop in energy prices. WTI crude has fallen over 15% in the last month to below $75 a barrel, and the IEA is forecasting a supply glut through next year. This points toward lower, not higher, inflation ahead. We believe this dollar strength presents an opportunity to position for a reversal in the coming weeks. The latest US CPI data, which showed core inflation easing to 3.2%, supports our view that inflation has peaked and the Fed will not actually hike rates. The market seems to be overreacting to the Fed’s guidance, a pattern seen in late 2018 when a hawkish Fed quickly pivoted. At the same time, the European Central Bank is facing stickier services inflation, which remains above 4%, increasing the chance of another rate hike from them. This policy divergence should put a floor under EUR/USD, which is currently struggling below 1.0600. We would look for chances to build long positions in EUR/USD for a recovery later this year.Start trading now — click here to create your real VT Markets account.
