US Dollar Bottoming Process May Finally Be Starting
- Yesterday that DXY Index closed above its daily 21-EMA for the first time since June 22.
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Effectively 'quantitative tightening,' the balance sheet unwind will be the withdrawal of stimulus from the US economy. Given the underlying instruments - Treasuries and agency mortgage-backed securities - it would appear that a balance sheet unwind announcement should help buoy long-end US yields. In turn, widening interest rate differentials and a steeper yield curve, over time, should help the US Dollar stabilize and break its 2017 downtrend.
Overall, the FOMC saw the median Fed funds rate at 1.4% at the end of 2017, as they did in December 2017, March 2017, and June 2017; and the median Fed funds rate at 2.1% at the end of 2018, as they did in December, March, and June. In sum, today’s statement can be seen as more hawkish than what markets were pricing in ahead of time, given the outlook for another hike this year; Fed funds were only pricing in a 45% chance of a third rate hike in 2017 ahead of the FOMC meeting yesterday. Rising rate expectations should likewise buoy the US Dollar.
After yesterday's events, outside engulfing - reversal - bars have appeared in EUR/USD, USD/JPY, USD/CHF, and Gold. The seeds of the US Dollar reversal have been planted. With the DXY Index closing above its daily 21-EMA for the first time since June 22 yesterday, the US Treasury 10-year yield above 2.224%, it now appears further gains are on the horizon for the US Dollar.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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