US dollar rally hits a wall

The Fed’s June hike talk has put new life into a battered US dollar, but with the price already rolling over, we could be seeing a marked change in trend. 

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:

US dollar chart

The corollary for other pairs such as EUR/USD and AUD/USD, which have already begun turning higher, would be an expectation of further gains, while equities may also add to the rally seen earlier this week. The Fed, it seems, has painted itself into a corner. 

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.