Mixed Messages From The Fed

The US Dollar is rallying today on the back of the March FOMC meeting yesterday. The Fed held rates unchanged, as expected, while lowering its dot-plot forecasts to two rate cuts this year, down from one prior. However, inflation forecasts were revised higher as the Fed warned of the impact of Trump’s tariffs. The Fed said that inflation is expected to rise this year, and more rapidly than initially thought, though it expects the move to be short-lived. However, given the Fed’s recent miscalculations with ‘transitory’ inflation spikes, it seems that traders aren’t quite buying that line this time.

Bullish USD Risks

For now, market pricing is still built around expecting a rate cut in June, with at least one further cut to follow. Market pricing has been more dovish than the Fed’s with money markets pricing around 0.65% worth of cuts this year, deeper than the .5% the Fed is projecting. Still, Powell has noted that the bank’s decisions will be in response to incoming data and with that, there are clear risks. If inflation does start to push higher as the impact of Trump’s tariffs make their way into the economy, rate cut forecasts start to look more misaligned. If this dynamic develops quickly, this could lead to a sharp repricing in rate forecasts, leading USD higher as shorts cover their positions.

Technical Views

DXY

The sell off in DXY has stalled for now into the 103.40 level which has underpinned price over the last week. With bullish divergence in momentum studies readings, risks of a reversal higher are seen. 104.59 will be the key challenge for bulls which, if broken, will alleviate near-term downside risks and put focus on a recovery back towards 105.97 next.