This Is A Big Week For Dollar Traders, Be Ware!
This is going to be a big week for the dollar. The market is expecting an FOMC rate cut in two weeks, this week’s news could reinforce or alter that perception. The Fed Chief Jerome Powell opened the door to a rate cut at his testimony last week but many, including myself, don’t believe it. The reason for the cut would be slowing and sluggish economic growth resulting from the trade war and tariffs. The trade war and tariffs are still in place, their impact on the U.S. economy is limited at least so far as the data is concerned.
While the data does show slowing in the economy it doesn’t show drastic, severe, deep, or troubling amounts of slowing. The NFP report for one shows the economy is still on solid footing if not expanding strongly. This week we’ll get reads on broad swaths of the economy including the Fed’s Beige Book and the risk my friends is that they will be too strong. This week’s calendar includes retail sales, capacity utilization, business inventory, housing starts/permits, the Philly Fed MBOS, consumer confidence, and the Leading Indicators.
The CME’s FedWatch Tool was showing better than 50% chance for two rate cuts, 50 basis points, at the next meeting before the NFP report came out. The NFP reduced the odds of 50 bps to near zero although it has bounced back a little since then. I would not be surprised if this week’s data was solid enough to bring the odds of one cut into question. The market needs to be prepared to be disappointed because the risk is bigger than that. Solid economic data may lead the FOMC to reduce the odds of future rate hikes expected later this year.
Basically, what I’m saying is the dollar could skyrocket on unexpected FOMC hawkishness. Not that the FOMC is going to be hawkish, what they are is going to be less dovish than expected, possibly a lot less dovish than expected. The DXY is currently trading within a range that has dominated prices for over a year. Despite this, the index is in an uptrend that began in early 2018. The index is still wrestling with resistance, hence the trading range, but the uptrend is intact. The weekly charts suggest the index is even now bouncing from key support levels and set to rocket higher.
A move above $97.50 would be bullish. A move above $98.00 would be very bullish. Such a move would confirm the rally and bring targets near the $100 level back into play. I could be wrong. The FOMC could do what the market and Trump both want, a big cut to rates, but I don’t think so. The data doesn’t force the FOMC hand so Powell has time to wait, be patient, and see what happens next. If we get a trade deal he won’t be thinking about cuts, he’ll be thinking about interest rate hikes.