US Dollar Poised to Continue Gaining Ground on Federal Reserve Hiking Bets


Talking Points:

  • A series of hotter-than-expected inflation prints have buoyed the US Dollar against its major counterparts.
  • This strength seems set to continue as market participants price in multiple rate hikes in 2022.
  • The US Dollar Index’s acceleration away from the neckline of a six-month Double Bottom pattern suggests higher-highs are on the cards.

The haven-associated US Dollar has steamrolled its major counterparts in recent weeks, on the back of the increasing likelihood that the Federal Reserve will have to taper harder and faster than originally anticipated. US consumer prices climbed at the fastest pace in over 30 years last month, as rising energy, shelter, food and vehicle prices all but shattered the central bank’s transitory inflation narrative. This drastic rise in prices is placing a significant amount of pressure on the Fed to taper faster than its announced $10 billion a month plan outlined in its previous meeting, and hike rates almost a year faster than expected.

Source – CME

Indeed, market participants are currently pricing in a 69% probability that the central bank will deliver an interest rate hike by June next year, as opposed to the 2023 timeline stipulated by US policymakers. However, this pricing appears rather aggressive when considering the rhetoric from several FOMC members. Federal Reserve Bank of Minneapolis President Neel Kashkari warned that “if we overreact to a short-term price increase, we can set the economy back over the long term”. This mirrors the comments of Fed Chair Jerome Powell, who has consistently stated that rising prices are a function of the global economy reopening after the coronavirus pandemic. Powell has also highlighted the Fed’s focus on the labor market, pointing to the significant amount of slack seen currently in comparison to before the pandemic in 2019.

US Labor Force Participation Rate

Although the unemployment rate has dropped sharply in recent months, it remains significantly higher than the 3.5% rate of 2019. Moreover, the labor force participation rate has continued to plateau just shy of 62%, much lower than the 63% seen before the pandemic. With that in mind, it seems relatively unlikely that the Fed will hasten its timeline now. Nevertheless, robust economic data would likely reinforce current market pricing and keep the US Dollar bid against its major counterparts.

US Dollar Index Daily Chart – Double Bottom Formation Playing Out

Technically, the outlook for the US Dollar Index remains skewed to the topside as prices accelerate away from the neckline of the Double Bottom pattern carved out between January and May of 2021.

Although a bearish Hanging Man candle has formed just shy of the 95.50 mark, an extended correction lower seems relatively unlikely.

That said, a short-term pullback to support at the September 2020 high (94.75) may precede an eventual move higher, with a daily close above the June 2020 low needed to carve a path for the index to fulfil the Double Bottom’s implied measured move.

Chart prepared by Daniel Moss, created with Tradingview