Hawks or Doves Set to Rule the USD Short-Term Future?

August 25, 2022
by Joseph Jeffriess, Market Analyst

Thanks for stopping by for today’s update. Our focus is on the USD index daily chart. We all know how the USD has been travelling recently, north north north.

The current up-leg was driven by the last FED minutes that partially contradicted the FOMC. Small hints started to suggest that the rate cycle might be toned down, which sent the USD lower before the message from the minutes indicated that rate rises could stay on the larger side and would continue until the FED saw inflation back at their target range.

It’s been mildly confusing of late as we have seen FED move away from its hawkish stance only to see it return. This will be the critical factor traders will be looking to read over this week/weekend Jackson Hole Symposium.

The opinion is that the message might not be good for doves, and many expect that the FED will confirm the hawkish stance seen in the last minutes, dashing any hopes of a rate cut next year. Traders will be looking at Powell’s speech to get a better idea of the further rate rises.

“Powell is likely to stress that policy still has a long way to go before the Fed will feel comfortable it has decisively turned the corner on restoring price stability,” Luke Bartholomew, senior economist at Abrdn, said in an email.

“This is important because the market has behaved recently as if the Fed has pivoted away from its hawkish stance.” – CNBC

I was quite surprised by the last FOMC statement and found the market reaction surprising as well. The minutes seemed to set the course back in the normal direction, and I wonder if Powell’s speech will reinforce this.

Risk markets have been bullish up to this point leading up to Jackson Hole, but we are seeing US futures start to back off after earlier highs. The EUR and GBP have been positive today but remain close to their weekly lows. Below we can see the daily USD index chart. The price remains firm on uptrends but continues to trade lower today after snapping its run this week.

The price could be forming a double top pattern. We would need to see a new move to the downside to confirm this. If the news comes out good on the rates front, this could be the driver, and we would look for 106.40 to come in as support.

If it comes in hawkish, we would be looking for the USD to continue on and hit new 2022 highs. We have noticed some demand coming back into play from 107.90 despite plenty of drive from some risk markets.

Fed Chair Jerome Powell will deliver his speech on Friday at 10 am Eastern Time.

USD Index D1 Chart

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