A range of financial markets remain risk-on ahead of the latest US inflation report which is expected to show price pressures turning further lower. This bullish market outlook remains at odds with the Federal Reserve’s ongoing rhetoric that rates will need to stay higher for longer to quell runaway inflation. While the US central bank sees the terminal Fed Funds rate around 5.1%, suggesting at least another 75 basis points of rate hikes, the market is pricing in 50 basis points of future hikes (2x25bps) before the Fed stops tightening monetary policy. The recent US dollar weakness suggests that the markets are not only questioning the Fed’s outlook, but they are also starting to ignore it. According to the latest CME FedWatch Tool, there is currently a 79% probability of a 25bp rate hike at the next FOMC meeting.
The risk going into today’s data release is that markets have become overly optimistic that inflation will fall by more than expected. Any disappointment today will leave a range of risk markets vulnerable to a sharp move lower, while inline numbers will leave further upside limited.
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While the short-term risk of a USD rebound is in play, the longer-term technical outlook for the greenback remains pointed to the downside. The US dollar index (DXY) is just a handful of pips above making a fresh multi-month low, while the current price is now below all three moving averages, a bearish technical backdrop. Add into the mix the recent 50-day/200-day ‘death cross’, and little technical support ahead of the May 30 swing-low at 100.96, and the longer-term US dollar outlook remains bearish.
US Dollar (DXY) Daily Price Chart – January 12, 2023
Chart via TradingView