US recap: Fed revives cautious dollar bulls, but data to dominate

Sept 20 – The dollar index was little changed on the day on Wednesday after fighting back from earlier losses as the Fed’s hawkish hold bolstered sentiment, but it struggled to advance further with markets convinced that there’s little the US central bank can do to lift rate expectations from here.

The Fed dot plots kept one more rate hike this year favored, while the previous 100bp of rate cuts in the median 2024 dot plot was trimmed to 50 bps, but overall the message once again was a state of data dependence.

Chair Jerome Powell said policy is already restrictive, and though the Fed has a lot of ground to cover before inflation gets back to target, the full effects of to-date tightening have yet to be felt.

EUR/USD plunged after the Fed announcement, sliding from near Wednesday’s 1.0737 high to new seession lows as 2-year Treasury yields shed early losses and rose to new 2023 and post-GFC highs.

A close below May’s major swing lows at 1.0635 is needed to trigger a further squeeze of what’s left of spec EUR/USD longs.

The dollar index is still working off overbought pressures from its 6% rise to major resistance since July’s lows.

Sterling was trading down 0.34% on the day. Earlier it had fallen to its lowest since May following below-forecast CPI, then rebounded ahead of the Fed.

Sterling would need to close above the 200-day moving average at 1.2434 to weaken the downtrend.

USD/JPY held modestly higher after the Fed events, and briefly breached the 148 hurdle in earlier trading, with the focus now on Thursday’s US data and Friday’s BoJ and Japan CPI report.

Some potential tension between US and Japanese officials regarding when Japanese FX intervention to support the yen might be justified may raise the bar for intervention and put more of the burden on BoJ policy normalization to underpin the yen.

Aussie and other high-beta currencies shed pre-Fed risk-on gains that stemmed from hopes the major central banks’ tightening cycles are either at or very close to cresting.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)