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USD Reeling after Fed's Dovish Hike; GBP a Buy on Dips around BOE

USD Reeling after Fed's Dovish Hike; GBP a Buy on Dips around BOE

2018-03-22 11:00:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- DXY Index pushes to lowest level since February 20 after the first FOMC meeting helmed by Fed Chair Jerome Powell.

- No move expected today, but BOE meeting should keep traders' attention tuned in to a 25-bps hike at the May meeting.

- See the full DailyFX Webinar Calendar for upcoming strategy sessions.

Looking for longer-term forecasts on the US Dollar and the British Pound? Check out the DailyFX Trading Guides.

US Dollar Finds No Relief in Powell's First Press Conference

The US Dollar (via the DXY Index) fell to its lowest level since February 20 after the first FOMC meeting helmed by Fed Chair Jerome Powell. The FOMC outlined a path for three total rate hikes in 2018 - as the market was pricing in ahead of time - and the terminal rate for 2020 coming in at 3.4% versus 3.1% previously.

Whatever hawkish bias was implied seems to have been overshadowed by market participants' concerns that the US economy is in the late stages of the business cycle. Equity markets near all-time highs, rising inflation, rising interest rates, weakening housing data, and assinine pro-cyclical fiscal policy - rising deficits and total debt - are all telltale signs of an advanced economy nearing the end of its growth cycle.

Accordingly, with these overarching concerns being augmented by the prospect of a trade war, the US Dollar found no relief in Fed Chair Powell's first press conference. For now, it's still appropriate to approach the DXY Index with a neutral bias, although we're getting close to switching back to an outright 'bearish' one given price action in EUR/USD, GBP/USD, and USD/JPY (see the above video).

Expectations for the Bank of England Meeting

The March policy meeting will see Bank of England take a similarly calm approach as last month. While policymakers released an updated Quarterly Inflation Report, the main overnight interest rate was held in check at 0.50%. Accordingly, without explicit forecasts due this time around, no policy measures are expected to change.

For now, with Brexit uncertainty seemingly finding clarity after the EU-UK transition deal was reached, and that inflation remains stubbornly above +2% y/y, the door is open for the BOE to enact another rate hike when their next QIR is released in May. The language surrounding the BOE’s policy statement today should prove supportive for the British Pound as a 25-bps hike is queued up. Join me today at 7:45 EDT/11:45 GMT for live coverage of the BOE rate decision.

Price Chart 1: GBP/USD Daily Timeframe (July 2017 to March 2018)

USD Reeling after Fed's Dovish Hike; GBP a Buy on Dips around BOE

The outcome surrounding today's BOE meeting leaves the British Pound in a 'buy the dip' situation. GBP/USD (as seen above) continues to trade within its uptrend from the November and December 2017 and Janaury 2018 lows, while the consolidation seen from mid-January to mid-March appears to have taken the form of a bullish pennant.

As such, with GBP/USD trading above its daily 8-, 13-, and 21-EMA envelope, and both MACD and Slow Stochastics trending higher in bullish territory, we're looking for GBP/USD to return to its 2018 high near 1.4346 over the coming sessions.

Similarly, EUR/GBP remains on track to test its recent lows near 0.8690, and it would stand to reason that, given the descending channel in place since September 2017, a deeper pullback to channel support near 0.8660 could be eyd over the coming sessions.

See the above video for technical considerations in the DXY Index, EUR/USD, USD/JPY, GBP/USD, EUR/GBP, and GBP/AUD.

Read more: US Dollar Whipsaws Around March FOMC Decision - No Direction


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

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