DXY Losing Bullish Posture, Broad US Dollar Outlook Turns Neutral

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The past 24-hours have proved disappointing for the US Dollar, as the Federal Reserve’s September meeting minutes revealed a deeper concern about low inflation among a wider array of policymakers than otherwise expected. This development offsets the otherwise hawkish implication that many officials foresaw a 25-bps rate hike coming in December.

The fact that December rate hike odds have barely budged the past 24-hours largely accounts for the limited reaction in FX markets. Yet looking further into the future, we can see that hike odds for 2018 are now pricing just less than two-and-a-half hikes for next year; last week, just over two-and-a-half hikes were being priced in. This erosion in the Fed’s glide path may account for the weakness that transpired for the greenback.

As a reminder, at the September FOMC meeting, officials saw the median Fed funds rate at 1.4% at the end of 2017, as they did in December 2017, March 2017, and June 2017; and the median Fed funds rate at 2.1% at the end of 2018, as they did in December, March, and June.

Overall, the US Dollar is in a less bullish position than it was 24-hours ago. The DXY Index is now below its daily 8-, 13-, and 21-EMAs, suggesting that the recent turn higher is indeed over.

Yet with US Treasury yields staying elevated, the implication is that while the US Dollar now holds a broadly neutral bias, there are still selective opportunities for longs: against the low yielding, safe haven currencies, the Japanese Yen and the Swiss Franc.