Talking Points:

- June Fed rate hike odds up to 88%, and odds for four hikes in 2018 are above 35%.

- The US Dollar has benefited from the release of the March FOMC meeting minutes, which suggested that policy officials see a greater risk of an inflation overshoot, meaning a faster rate hike path is possible.

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The US Dollar has firmed up quickly in the second half of the week thanks largely due to the release of the March FOMC minutes yesterday. The minutes, which detailed a policy meeting that yielded a 25-bps rate hike, an upgraded economic outlook, and a more hawkish ‘dot plot,’ carried a clear message: there are risks to the upside for both inflation and growth, so markets should be prepared for a steady diet of rate hikes moving forward.

While Fed rate expectations were dampened coming out of the disappointing March US Nonfarm Payrolls report last Friday, they have quickly rebounded after the March FOMC minutes. At the start of this week, the implied probability of a June hike were down to 78%; they are now 89%. Similarly, odds of seeing four hikes this year have increased from 23% to 37% in recent days.

Table 1: Fed Funds Rate Hike Expectations (April 12, 2018)

Central Bank Weekly: US Dollar Gains as FOMC Minutes Point to More Hikes

Even though the US Dollar has been trading independent of rate hike expectations shifts since the beginning of March – largely due to the overhang of fiscal uncertainty in the form of ongoing trade disputes among NAFTA members and between China and the US – the uptick in rate expectations has proven to be a veritable positive for the US Dollar once more.

But given the significant degree to which a June hike is priced in, and now that odds of a third hike this year in September have crossed the key 60% threshold, it would reason that the key pricing to watch for would be the December hike odds.

Price Chart 1: DXY Index Daily Timeframe (September 2017 to April 2018)

Central Bank Weekly: US Dollar Gains as FOMC Minutes Point to More Hikes

Even though the DXY Index is no longer trading within the downtrend from the December 2017 and January 2018 swing highs, it continues to flirt with the downtrend since March 1. Ultimately, price still remains below 91.01, the 2017 low set on September 8 (which subsequently marked a morning doji star candle cluster failure in mid-January as well as the March 1 key reversal).

Similarly, given that trading is not only a function of price but also of time, the DXY Index would need to contend with the descending trendline from the November and December 2017 highs once it reached 91.01 before a serious attempt at a low could be called. Increasing December rate hike odds are helping the greenback stabilize, however.

Read more: US Dollar Up, Gold Down as Trump Backtracks on Russia and Syria

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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