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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. 

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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. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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