How U.S. Dollar Will Play Fed’s Firming Stance on This Year’s Tapering

On Thursday, the U.S. dollar rose to a nine-month high against major peers on expectations that the Federal Reserve will begin cutting its huge stimulus as soon as this year. It doesn’t matter whether we believe in a possibility of Fed’s tapering under current conditions implying so many unknowns including the pace and severity of Delta Covid variant, what matters is that markets apparently look unsettled by the very idea of a slight austerity. In the July 27-28 FOMC meeting minutes released yesterday, Fed officials saw an opportunity to hamper stimulating bond purchases this year rather than next year as was previously announced “if the situation continues to improve as expected”, albeit being subject to “substantial further progress” toward maximum employment which had not yet been met.

Additional momentum for the U.S. Dollar is created by the fact that the tapering rhetoric by the Fed is already interpreted by investors as hawkish, while the central banks in the EuroZone, the U.K. and Japan remain dovish and are not expected to tone up their relevant statements anytime soon.

The dollar index, DXY, which measures the US currency against its major six peers, climbed to 93.502, its highest level since Nov. 5, before narrowing gains to a 0.21% gain to 93.41 so far. The euro fell to $ 1.16655 for the first time since Nov. 4, while the Aussie slipped to $ 0.7198, a level not seen since Nov. 5, and the kiwi fell to $ 0.68465, its lowest level since Nov.13.

Speaking about the DXY’s opportunity of further advance, first of all, its pierce through the March 31’s main top at 93.430 already set up the discussed uptrend. A return through today's intraday high at 93.515 will bolster chances of the uptrend resumption. The implied support level signifying change to a downtrend is around 92.47 - which looks unrealistic to be reached in the near term given the above fundamental considerations. The current channel range is 92.470 to 93.515 representing the DXY’s 50% level or pivot at 92.995 where the nearest support is.

If fundamental factors stay intact, the DXY uptrend points to a target range of 94.168–94.171, which can be reached around the first week of September.