USD Recovering

The US Dollar continues to grind higher as the greenback recovers further ground on the back of last week’s inflation-driven fall. Data last Wednesday showed that US CPI cooled for the first time in six months over April. While initially seen as a strong sign that the Fed will have room to cut rates in September, we’ve heard plenty of pushback from several Fed members since then, helping USD recover some of those losses.

Fed Pushback

Echoing statements earlier in the week by Fed’s Bostic and Jefferson, Fed’s Waller last night again urged caution and patience from the Fed. Waller told reporters that he wants to see several months of good inflation data before lowering rates. He went on to say that the Fed could cut rates by end of year if inflation continues to fall but urged the need to hold policy at current levels of as long as it can. This view was shared by Fed’s Barr who said that inflation progress had been disappointing and warned that tight policy needed more time to work.

September Easing Expectations

With clear pushback from the Fed, and inflation still well above target, there is a sense that traders got ahead of themselves with the sell-off last week. Powell’s last comments signalled a desire to pursue inflation as soon as the time was right but we’re likely to need a much more convincing drop in inflation. For now, June looks firmly off the table but September remains a strong possibility for a cut with USD vulnerable to further downside if we see a fresh inflation fall in coming months. Traders will now be looking to tonight's FOMC minutes for further clarity on how much support there is for near-term easing.

Technical Views

DXY

The sell off in DXY has seen the market breaking down below the 104.95 level. Price has since tested the bull channel lows and found support. Bulls need to see price back above the 104.95 level to put focus back on a continuation higher towards 107.04 or risk a test of deeper support next at 103.48.