Fed: Validation of rising yields to fuel the greenback – BBH

In 2019, DXY weakened on five of eight FOMC meeting days. In 2020, DXY has weakened on nine of ten decision days. This pattern may have changed this year. The dollar gained at the January meeting. If the Fed is unable to shift market expectations away from rising yields at this week’s meeting, then economists at BBH would expect rates to spike higher and give the dollar further fuel to rise. 

Key quotes

“We view recent dollar softness as largely profit-taking and consolidative in nature. As such, we believe DXY is still on track to test the November 23 high near 92.80 and then the November 11 high near 93.208.” 

“Longer-term, a break above the 92.628 area would set up a test of the September high near 94.742.” 

“The euro is nearing support around $1.19 and remains on track to test the November 23 low near $1.18 and then the November 11 low near $1.1745.” 

“Sterling is softer after being unable to break back above $1.40 and is likely to test the March low near $1.3780. Looking further out, a break below $1.3825 would set up a test of the February low near $1.3565.” 

“The rise in USD/JPY has resumed and the pair has traded at a new cycle high near 109.35. We believe the pair remains on track to test the June 5 high near 109.85 and then March 2020 high near 111.70.”