Fundamental Outlook for the US Dollar: Neutral
- The US dollar rose to new highs after an eventful week of trading
- Fed rate hike bets, economic outlook dictates strength of DXY
- Mr. Powell’s testimony before Congress may see the US dollar fluctuate in the future
The US dollar hit its highest level in 2022 before the Fed rate announcement, with the DXY index reaching 105.78 before paring gains and ending lower during the week. The volatile geopolitical landscape, volatility in stock markets, and the threat of persistent inflation have helped the US dollar rise over the past several months. The chance of a easing of geopolitical tensions seems untenable at the moment, given the conflict raging in Ukraine.
However, markets may reassess the dollar’s position over the next week as traders gauge the health of the market and the prospects for a recession. The FOMC’s 75 basis point rate hike eased some inflationary fears, but the threat of slowing economic growth is now weighing on sentiment, especially with market bets emerging as a good opportunity to raise another 75 basis points at the July meeting. The Fed appears willing to sacrifice economic growth to cool prices.
As recession fears subside, so will the dollar, given its status as a safe haven currency. The Atlanta Federal Reserve’s GDP model now sees real GDP growth of 0.0% in the second quarter as of June 16. The next update to the model is scheduled for June 27. Upcoming economic events in the US such as existing home sales, MBA mortgage applications, consumer sentiment, and initial jobless claims will be a heavy focus to gauge the health of the US economy next week.
However, the main focus for the dollar is testimony from Federal Reserve Chairman Jerome Powell. The central bank chief is expected to present his semi-annual monetary policy speech to Congress. Mr. Powell will speak before the Senate Banking Committee on June 22. Lawmakers are likely to ask questions about the response to the pandemic and the general strength of the US economy. The dollar may rise if Mr. Powell’s already strong expectations of further tightening rise.
— By Thomas Westwater, Analyst for DailyFX.com
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