(In)Digestion for USD-pairs as Reality Sets in for FOMC
- EUR/USD quickly approaching the February highs.
- As FX market volatility stays elevated, it's a good time to review risk management principles.
We've been consistent in our skepticism over the US Dollar's strength through Q1'16, even going so far as to say that the Federal Reserve's untethered projected policy path would be a "major problem" for the US Dollar in the wake of the Fed's confusing decision to keep rates - and its dot plot - unchanged in January. So, for us, as both active market pariticpants and passive market observers, seeing the Fed backtrack and reconcile its forecasts with those more closely resembling what the broader market believes offers up a vindicated sigh of relief.
For the US Dollar, no such solace exists.
Chart 1: Fed's Dot Plot from March 2016 - Updated March 17, 2016
The Fed's glide path (as seen in the chart above) has seen consistent downgrades to its rate of change and terminal rate level. The US Dollar may still be the greenback, but it's green in the face now that the Fed has all but stamped out the "divergence trade" that's carried the world's reserve currency for the past two years.
Instead, no matter where you turn, US Dollar charts are 'puking' - most everyone was on one side of the trade, and now everyone is rushing for the exits at the same time.
--- Written by Christopher Vecchio, Currency Strategist
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