USD Set To Rebound; Market Missing True 'MEANing' On Fed Dots

[thenews]

The Fed didn’t say much in its statement, so investors were left to zero in on the dot plots. And with the median going down from four hikes in 2016 to only two, markets decided that the Fed isn’t confident in its just started hiking cycle. Having systematically failed to deliver on past projections, why would this time be any different?

But the weakening in the US$ following the Fed may be an overreaction. Looking at the mean instead of the median forecasts shows a much less severe downgrade in projections. And all but one official still expects at least two hikes – more than markets are now pricing in.

Signs that the Fed isn’t quite as dovish as people now think should lead to a rebound in the greenback heading into what we still see as a likely June move.

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[thenews]

USD Finds Better Traction The US dollar rose against all the major and most emerging market currencies last week. After selling off following the ECB and FOMC meetings, the dollar found better traction. It was helped by widening interest rate differentials. Regional Fed manufacturing surveys for March suggest the quarter is ending on a firm note. With new orders rising, it is reasonable to expect the momentum to carry into Q2.

Nearly half of the regional Fed presidents spoke last week, and the general takeaway is that the Fed's rate hiking cycle is likely to resume in the second quarter. Several reiterated what Yellen indicated at the press conference following the FOMC meeting, namely that the April meeting is live. There is a small chance of a hike then, priced into the Fed funds futures, but we suspect that a strong employment report on April 1 will see the risks of an April move increase.

One of technical factor that emerged last week was the beginning of the correction of the dollar's losses. This is most evident the in the Dollar Index and its biggest constituent, the euro. The first thing to note is that the Dollar Index and euro have already retraced more than 61.8% of the move following the FOMC meeting (found near 96.10 and $1.1165 respectively). The overshoot has been minor, meaning that both the Dollar Index and the euro are at potential turning points. However, the technical indicators point to a further dollar recovery.

The next logical assumption is that the dollar is recovering from the sell-off since the ECB meeting on March 10. The Dollar Index met the 38.2% retracement near 96.05. The 50% retracement is seen near 96.50, which corresponds to the 20-day moving average (~96.60). The 61.8% retracement is around 97.00, which is where the Dollar Index peaked the day the FOMC statement and dot plots were updated March 16 (~97.05).

The euro has also retraced 38.2% of the post-ECB rally. It has not convincingly gone through it (~$1.1140). The 50% retracement is just above $1.1080. Between the ECB meeting and the FOMC meeting, the euro built a little shelf near there. The 20-day moving average finished last week a little below $1.11.

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