The dollar rally on Tuesday is not as pronounced as the day before, but it is more of a pause than a trend towards a corrective decline. The growth potential of the US currency is not exhausted at the moment, it will still manifest itself in the coming sessions.
The growth in demand for risky assets was recorded on Tuesday, however, during the hours of the US session, the markets were again in the red. Not such a deep negative, of course, and yet the general mood reads well.
So, what is important to know about the movement of the dollar in recent sessions and what does the technical picture show?
The US currency index has reached its highest level in 20 years, and nothing will prevent it from breaking through more significant marks in the medium term. The first target on the near horizon is the level of 107.00.
"Aggressive risk aversion, following another strong CPI report and record low consumer sentiment published at the end of last week, should lead to the index continuing its ascent," Westpac economists write.
After breaking through 107.00, new horizons will open for the dollar, bulls will aim for the 116.00 mark.
If you look at the monthly timeframe, you can see that the current growth of the dollar originates from the lows of 2021. A clear direction of movement increases the likelihood of forming new extreme highs.
It is also worth paying attention to the red line drawn on the chart. This is the neck line of the head and shoulders continuation scale pattern. As can be seen from the graph, this model began to form at the end of 2016.
The current height is just over 1500 points. The target level of breaking through the level of 102.00 with a high degree of probability will be the level of 116.00. The recent ceiling becomes a support level.
You can find additional nuances on the chart confirming the upward nature of the trend.The fundamental picture is also on the dollar's side. The Federal Reserve will have the last word.
What to pay attention to
The 2-day FOMC meeting begins today, following which it will be announced about the current rate hike and the next steps. The markets are actively laying for a 75 basis point rate hike
The Fed, when determining the parameters of the monetary policy, focuses on three key indicators. These are GDP, the inflation rate and the labor market. If the labor market looks quite healthy, then accelerating inflation and weak economic growth indicators pose a difficult task for the management of the central bank. We need to contain inflation so that there is no deep recession as a consequence. A difficult rebus even by the standards of the Fed.
Following the announcement of the decision on the rate (it is expected to decrease by 50 bps), a press conference will be held on Wednesday, to which you should pay attention.
If Fed Chairman Jerome Powell's rhetoric is perceived by market participants as soft (we will talk about a pause in the policy tightening cycle after the June meeting), then the dollar risks collapsing. However, the drop may not be as significant as it may seem at first glance. Most likely, the decline will be limited.
In general, the dollar retains space for further growth, since the Fed's policy is still aimed at tightening. In addition, the greenback is in active demand as a safe haven currency.
The main goal of the Fed, as Powell recently noted, is to contain inflation. Judging by Friday's indicator, the central bank will be determined. At least that's what the markets, which are now in a state of heightened anxiety, think.
The Wall Street Journal analysts added fuel to the fire today by publishing a new report containing a preliminary overview of the FOMC's actions.
"The sequence of alarming inflation reports in recent days is likely to make Fed officials think about an unexpected 75bp rate hike this week," they write.
These information outbursts are still completely speculative, and the consensus still suggests a 50bp rate hike at Wednesday's meeting.