The US Dollar index witnessed a strong recovery and saw the index hitting a high of 91.48 levels after the hawkish signals by Federal Reserve monetary policy. The dot plot suggests a majority of 11 Fed officials pencilled in at least two quarter-point interest rate increases for 2023, that is at least two rate hikes could come as soon as 2023. The market participants were expecting the Federal Reserve to tighten monetary policy in early 2023 as March had projected no increase in interest rates until at least 2024. This came as surprise to dollar bulls, as they were waiting for the Fed to hint at the rate hike cycle to increase their bets at the Jackson Hole Symposium.
But the Fed officials have pledged to keep policy supportive for now to encourage an ongoing jobs recovery. The US is still short 7.6 million jobs from where it stood in February 2020. Thus, the central bank will continue asset purchases at a $120 billion monthly pace until “substantial further progress” had been made on employment and inflation. Now if the Fed is planning to hike twice in 2023, that means it will start to tighten its monetary policy much sooner. This means ceteris paribus, we can expect the Fed to start tapering its balance sheet somewhere end of this year (likely December) or early next year. We will get to know about it at the Jackson Hole Symposium due on Aug 26-28, 2021. Until then, the trend in the dollar will be decided by the high-frequency indicators.
The Fed believes that the economic data will continue to improve in the coming months, so it has raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection of 2.4% and expects the economic growth to hit 7% this year. An upbeat US economic data will increase further bets for an early rate hike, keeping the dollar bulls active. Meanwhile, the rally may be capped on any US Biden’s administration plans to push the bipartisan infrastructure deal to support the economy. The current upswing in the dollar index can test its next resistance between 91.90–92.25 areas before fresh selling is seen. The Dollar index needs to sustain above these areas to see a breakout towards 93.35-94.10 areas. The bears will continue to hold a dominant position until then. Failure to sustain above the resistance areas will see the counter retrace towards 90.30/89.70 levels again. A daily close below 89.70 will open targets of 88.25/87.60 levels for the Dollar Index.
The safe-haven gold, which is highly sensitive to an increase in the dollar, hovered near a more than one-month low of 1799.70. The stronger dollar and higher US interest rates make dollar-denominated commodities more expensive for other currency holders, translating into a higher opportunity cost of holding gold. So, after the Fed policy gold’s appeal has become somewhat dull. Comex Gold prices have retraced from their intra-month highs of 1916.53 levels to hit a low of 1803.68 levels posts the Fed policy. Sustenance below 1800 levels will open downside targets of 1779.50/1756.50 levels for the current corrective leg. The counter will see recoveries towards 1840–1850 areas until 1800 holds. A complete reversal towards 1916 levels will now be seen only above 1863 levels. The bias will stay negative until then.