King Dollar Continues To Dominate The Majors

Dollar Dominance and the Fed’s Tightening Grip on Financial Markets

Certainly, the dollar is currently a wrecking ball driving broader FX movements after a 6.7% rally from its mid-July lows. The ongoing rally seems relentless with US exceptionalism powering an advance in the world’s premier reserve currency. US Treasury yields have been on a tear after the recent FOMC meeting confirmed, via updated revisions in the dot plots and economic projections, that policymakers are determined to keep rates higher for longer to bring inflation back to target. The 10-year US Treasury, often seen as a global proxy for borrowing costs, has hit 16-year highs recently above 4.50%.

Even yesterday’s muted US consumer confidence data was shrugged off as a round of defensive re-positioning amid subdued risk sentiment fuelled new highs in the dollar index (DXY). The next upside level for the bulls is the November high at 106.82 with the round number of 107 no doubt an attractive target. The halfway point of the September 2022 decline sits at 107.17. Of course, the Fed remains data dependent and this will need to remain resilient to confirm the FOMC’s fairly optimistic recent economic forecasts. We have heard from officials already this week with the hawk Kashkari remarking that he expected one more rate hike this year while Bowman also hinted at more tightening.

Interestingly, some of the more influential members are likely less hawkish than the median dot which showed only 50bps of rate cuts in 2024 and 2025. Indeed, Chair Powell also mentioned several times during his press conference that the Fed will proceed “carefully” given how far the FOMC has come. The lagged effect of the most aggressive rate hike cycle in living memory is sure to impact the economy at some point.

Powell also highlighted some of the potential headwinds on the horizon, with near-term ones like the auto strike and a government shutdown worth monitoring over the coming days. Further out, tightening financial conditions, not least seen in higher borrowing costs and less credit availability, plus the restart of student loan repayments are expected to hurt activity going forward.

Technical Forces Favour USD Bulls

In the meantime, key levels and news to look out for in the majors include the March low at 1.0516 in EUR/USD. Sticky eurozone inflation data released on Friday could also push up the odds of another rate hike and underpin support for the single currency.

USD/JPY is deeply into intervention territory by the Japanese authorities with the major highly correlated to US Treasury yields. History tells us that a global environment of falling growth and inflation tends to favour the yen.

GBP/USD is deeply oversold on numerous technical momentum measures, but a drop to the 1.21 area seems likely at this stage with few catalyst to upend the long-term bear trend.

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