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The French election trade unwind continues to work its way through the markets, with long EUR positions continuing to be sold, while long JPY positions (serving as a hedge) come off as well. With the bulk of political risk for Europe out of the way for the near-term - German elections in September barely warrant a mention, while potential Italian elections in Q4'17 should be the main concern - it seems attention is quickly shifting back to the US Dollar.
The greenback has enjoyed a nice run at the start of the week, with DXY Index reclaiming its year-long trendline from the May, June, and August 2016 lows. Of course, this is largely due to the EUR/USD pullback, as Euro accounts for 57.6% of DXY. Nevertheless, the US Dollar is also enjoying a rejuvination of speculation around the Fed's rate hike timeline after Friday's April US labor market report: the odds of a June rate hike have increased from around 70% last week to 100% today.
Table 1: Fed Rate Hike Expectations Through January 2018
Likewise, longer-dated rate expectations are starting to pick up as well. In between the time the video in this article was recorded and when this article was written, December rate hike odds moved back above the key 60% threshold, now currently 63%. The market's pricing for the Fed's glide path is still slightly dovish compared to what the Fed has stated it may due, with only two rate hikes priced in for June and December versus the Fed's projected path of rate hikes in June and September, then balance sheet normalization beginning in December.
With long-term seasonality serving as a considerable tailwind for the US Dollar, there are chances for further gains in the days ahead. While the US economic calendar is rather dull until Friday (when April CPI and Advance Retail sales are due out), there are Fed speakers on the calendar every day this week, including three today.
Should Fed policy officials tow the line that the Fed sees two more rate hikes this year plus the beginning of balance sheet normalization, the US Dollar should continue its run higher. The first key level to look for in DXY Index is 99.46, the high of the outside engulfing bar on May 4. Clearing this resistance plus a move in EUR/USD below 1.0850 would suggest that DXY has bottomed.
--- Written by Christopher Vecchio, Senior Currency Strategist
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