Trade Of The Week: Big Week For Dollar As Focus Shifts To Fed

King dollar kicked off the new week on a solid note, asserting its dominance against all G10 currencies as investors evaluated last Friday’s red-hot US inflation figures and China’s Covid woes.

Rising Treasury yields remained an ally to the greenback with the Dollar Index (DXY) advancing above 104.60 as of writing.

The equally-weighted USD index also pushed higher as prices ventured to regions not seen since mid-May.

With bulls in the driving seat, the greenback could be set to hit fresh two-decade highs in the week ahead. However, such a move may need to be triggered by a catalyst in the form of the Fed meeting on Wednesday or economic data later in the week.

The low down…

US inflation unexpectedly accelerated to 8.6% last month which was the highest level in more than 40 years.

This rocked financial markets and fuelled fears of more aggressive interest rate hikes by the Federal Reserve. Markets were initially forecasting consumer prices to hit 8.3%...but the red-hot figure poured cold water on hopes of inflation peaking. Investors are set to remain on high alert with expectations mounting over the Fed adopting a more aggressive approach towards taming the inflation beast.

Such a development could add more flavour to the upcoming Fed meeting on Wednesday, especially Jerome Powell’s press conference after the rate decision.

The week ahead…

The major risk event for the dollar will be the Fed meeting.

Markets widely expect the central bank to raise interest rates by 50 basis points. However, the main attractions are likely to be the economic projections, dot plot, and most importantly Powell’s post-meeting news conference.

According to a report on Bloomberg, traders are projecting the Fed to raise interest rates by 75 basis points at least once in its next three meetings. The last time the central bank raised interest rates by 75 basis points was back in November 1994! Much attention will also be directed towards the economic projections which could provide clues on how long the Fed plans to raise rates and its impact on economic growth. Another hawkish set of dot plots could spark some action and keep dollar bulls in good health.

If Jerome Powel strikes a hawkish tone during his conference and signals the Fed maintaining its aggressive approach towards rates, dollar bulls could be empowered. Alternatively, a cautious sounding Powell may cool rate hike bets, limiting the dollar’s upside gains.

On the data front, it may be wise to keep an eye on the US weekly initial jobless claims on Thursday and US May industrial production on Friday. Given how both reports could provide further insight into the health of the US economy, this could impact the dollar.

Dollar set to tighten grip on throne?

It looks like the equally-weighted USD Index could be gearing to push higher with 1.1850 acting as a key level of interest.

Prices remain bullish on the weekly timeframe and daily timeframe. Beyond 1.1850, the next key point can be found at 1.2070. A solid breakout above 1.2070 could open the doors towards 1.2300.

Should 1.1850 prove to be reliable resistance, a decline back towards 1.1450 could become reality.

On the daily charts, things look slightly more colourful. Prices are pushing higher with 1.1850 acting as the first level of interest. A breakout above this level could open the doors towards 1.1950 and 1.2070. Sustained weakness below 1.1850 could open a path lower towards 1.116, 1.1450, and 1.1350, respectively.