- DXY all depends on the reaction of the market in the coming days to the Jackson Hole.
- Risk-on markets are the status quo, so the question is whether Powell will rock that cradle?
The countdown to what could turn out to be a non-event is underway, but nevertheless, the Federal Reserve chair will deliver a keynote speech on Friday and markets are in high anticipation of it.
Either way, it matters for the US dollar and there could be a decisive bias that will be priced in over the coming days, if not immediately, depending on the outcome.
The status quo would play out if Powell sticks to the same script as we have heard over and over again in recent weeks, in the last Federal reserve decision and minutes thereof.
In such a scenario, risk-on will likely leave the US dollar exposed to flows moving into commodity currencies and EM-FX in a rebalancing act in forex.
For instance, the MSCI EM Currency overview has started to stall on the downside as the taper-tantrum risks evaporated from market chatters in recent weeks.
The Fed has done a very good job in their guidance surrounding how they would intend to first taper and what conditions would be required in order to do so and then ultimately move to lift-off in terms of raising rates.
Therefore, they can be no surprises from the Fed, not of the same ilk of May 22 2013, an event that was dubbed the "Taper Tantrum," when the then-Fed Chairman Ben Bernanke stated in testimony before Congress that the Fed may taper the size of its quantitative easing (QE).
The S&P 500 fell 3% over the course of just two sessions and then fell an additional 4.5% before month-end.
Yields on the 10-year Treasury rose from 2.010% to 2.1660% over the same period.
With all that being said, the US dollar has eased of late, slipping from the highest levels through a critical level on the long term charts as prospects of a taper announcement or imminent start to a taper were dialled back towards the end of the year.
Therefore, should Powell rekindle expectations of the start date coming sooner, then there is dry powder sitting on the sidelines that could move back into the US dollar and send it back on course for higher highs.
US dollar at make or break point, countdown to taper
DXY technical analysis
The US dollar DXY index is at a critical juncture and if can't get back above 93.50, mounting pressures will likely see it looking to the abyss on a break of 92.80.
(Daily chart)
(Monthly chart)
