Further DXY Gains Hinge on EUR/USD, Not USD/JPY
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The US Dollar has been faced with a quiet economic calendar thus far this week, and that won't change until Friday, when the April Advance Retail Sales and Consumer Price Index are due. In absence of economic data, however, traders have been focusing on the slew of Federal Reserve policymakers giving speeches the last few days, which will continue with two more today.
As it's been eminently clear from what we've heard thus far this week, there seems to be a coordinated message from Fed speakers: there will be at least two more rate hikes this year, plus the beginning of the balance sheet normalization process. While further comments to this theme won't necessarily improve front-end rate hike odds - June is already comfortable at 100%, per Fed funds futures - the back-end of the 2017 glide path could see further steepening.
After all, the Fed has indicated it wants to hike twice more this year plus the balance sheet normalization, which given the proclivity to only act at the quarterly meetings with new economic projections, means the window is only open in June, September, and December. Accordingly, a unified tone from Fed officials to suggest that rate hikes are coming in June and September follow by balance sheet normalization in December would be a slightly more hawkish than what rates markets are currently pricing, which are for hikes in June and December (and no balance sheet normalization this year).
Certainly, the upcoming data on Friday will be the most important catalysts of the week - any evidence that the US economy is picking back up with give credence to the Fed's view that Q1 data weakness was simply transitory will strengthen the case for the market to buy into policymakers' more hawkish (relative to current market pricing) tone.
For the DXY Index, it cleared an important hurdle yesterday, the outside engulfing bar established last week at 99.46, but further gains will be difficult to come by unless EUR/USD continues to play ball. EUR/USD is coming into significant support around 1.0850, and as the largest component of DXY Index, only a breakdown will clear the path for futher DXY gains. While USD/JPY has had a very strong run the past three weeks, as only a 13.6% weight in DXY, it will be inconsequential to helping DXY extend its rally if EUR/USD does not participate.
--- Written by Christopher Vecchio, Senior Currency Strategist
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