A June move is, apparently, a likely eventuality, according to the latest Federal Reserve minutes and recent speeches from policymakers. Clearly they are not going to signal that the Fed definitely will hike in June, but they have come as close as possible without compromising their ‘data dependent’ stance.
The market has clearly taken the comments and minutes as an excuse to keep buying the dollar, with the trade-weighted dollar index (US dollar basket on the IG platform) rallying off its lowest level since January 2015.
However, most of the gains came in advance of the release of the minutes, with the market effectively front-running the Fed. Now that the news is ‘in the price’, the Fed (starting with Janet Yellen’s appearance tomorrow) risks pulling the rug out from underneath the US dollar rally.
Data from the Commodity Futures Trading Commission shows that speculators (institutional investors, hedge funds etc) are still expecting further gains, with positioning 36% bullish. While this does not indicate excessive levels of bullishness, we could see some of these positions unwound, creating further downward pressure.
If the Fed fails to hint once more at a June move, then the current downward turn in the US dollar index, which after all looks to be a rally as part of a broader downtrend off the January high, will gather momentum. The index is already in a downward channel, and with the price and relative strength index both turning lower, the risk is that we see a move to 94 or even to the 92 low, which would take the price back to the bottom end of the channel: