2022/04/20 (029) Technical Analysis – DXY

Bullard brings up 75 basis point moves,
may be that`s why USD Index hits 24-month high!
USDJPY recovery seen short-lived & EURUSD with new lows…


Bullard brings up 75 basis point moves

How different does it sound from the Fed meanwhile. As is well known, St. Louis Fed President Jim Bullard already brought up the idea on Monday the 18th that the Fed could also take steps of 75 basis points. So that the key interest rate can reach neutral levels (which should be somewhere around 2½%) and be raised above them as quickly as possible. Of course, as long as the key interest rate is below “neutral levels”, monetary policy is actually not yet restrictive, but rather expansive. Just not quite as expansive as with 0%. Clear, it’s not that simple, because a market that expects interest rates from a central bank with sufficient certainty already reflects these expectations in higher interest rates on longer-term contracts (e.g. in higher yields) and therefore the prospect of restrictive monetary policy already has a restrictive effect – even if one central bank is not in a hurry. And besides, it’s Bullard who came up with this idea. He is known for spreading unconventional ideas. On the other hand, this is exactly why he was often the FOMC member who was the 1st to announce new monetary policy turns.

The FX market took a USD-positive note on Bullard’s comments. This is understandable at first glance. Finally, I argue above that the ECB’s hesitant stance is EUR-damaging at the moment. And nobody can be more different than Bullard. However, there is too much of a good thing in everything. If the Fed raises its base rate too quickly, there is a risk of a “hard landing” and the US economy sliding into recession. Will the Fed still keep raising interest rates? She did so in the early 1980s. But circumstances were different then. At the moment the market doesn’t trust her to do anything similar. The market-based Fed interest rate expectations indicate that the market (a) does not expect a Fed interest rate above approx. 3% and (b) already assumes that interest rates will fall again in 2024. The market doesn’t believe the US economy or the Fed will achieve the 3.5% that Bullard expects. Probably because it is assumed that this would lead to a recession and that the Fed would then let go of such restrictive monetary policy.Neither is safe. However, the faster the Fed raises interest rates, the greater the risk of a recession. I wouldn’t be surprised if the same FX traders who are currently backing Bullard’s words with USD strength would then be the first to sell the dollar back. And that’s exactly why I think any USD strength resulting from his comments is overdone. At least as long as one cannot be sure that (a) radical interest rate hikes will not lead to a recession or (b) the Fed would not abandon its restrictive monetary policy in the event of a recession.

Has the euro seen the lows yet?

The market obviously has to digest what ECB boss Christine Lagarde put in front of it on Maundy Thursday. Because in view of an inflation rate of 7.5% and a core rate of 3.0% in March, it was easy to imagine that the ECB could have been a little more specific with regard to possible interest rate hikes. The market was correspondingly disappointed.

Has the euro seen its bottom now?
I don’t think we can necessarily assume that. For one thing, the danger of an energy crisis, which would weigh heavily on the eurozone economy, has not yet been averted. On the other hand, the first estimate of April inflation will be published next week. At best, inflation is likely to have gradually peaked and is slowly falling again. However, according to our experts, the rate will not fall below 7% again until the middle of the year. The market could punish the ECB’s hesitant willingness to act in the fight against inflation and put downward pressure on the euro accordingly.

Sure, at some point the market can probably be more certain that the ECB will also raise the key interest rate in the autumn. But only with increasing certainty can the euro recover. At the moment the market lacks this certainty, so that the risks in the euro are still on the downside.

Dollar Index Hits 24-month High

The dollar index broke the 101 mark for the first time since March 2020 on Tuesday, underpinned by soaring US Treasury yields, as investors braced for multiple half-point rate hikes from the Federal Reserve as it seeks to rein in soaring inflation. St. Louis Fed President James Bullard, a noted hawk, said Monday US inflation is “far too high” as he repeated his case for increasing interest rates to 3.5% by the end of the year. The Fed raised its target policy rate by 25 basis points last month, and its forecasts released at the time showed policymakers expected rates to rise to 1.9% by year-end. Bullard’s preferred rate path would require half-point rate hikes at all six of the Fed’s remaining meetings this year. The dollar also gained on expectations of good economic data, with analysts pointing to the US economy’s outperformance relative to other major economies amid global headwinds.

Yen Recovery Seen Short-Lived

The Japanese yen appreciated 0.5% to 128.5 per USD on Wednesday, after reaching a 20-year high of 129.4 early in the session, and following a 13-day slump, but the recovery is expected to be short-lived. The yen remains around levels not seen since April of 2002, amid diverging monetary policies between the BoJ and the Fed. The Bank of Japan stepped into the market again to defend its ultra-low interest-rate policy on Wednesday and offered to buy an unlimited amount of 10-year government bonds after the benchmark 10-year yield reached 0.25% the day before, the central bank’s implicit upper limit. Meanwhile, Japanese Finance Minister Shunichi Suzuki said Tuesday the negative economic impact from a weakening yen at present outweighs the benefits, in the most explicit warning against the currency’s slump.