Bearish Bets Rise After Fed's Hawkish Pauses

The Federal Reserve maintained its current interest rates during its recent meeting; however, it unexpectedly revealed a more aggressive stance by projecting two additional rate hikes in 2023. This decision was driven by the persistently sluggish decline in inflation rates. The strength exhibited by the economy in the face of tightened financial conditions, coupled with the resolution of concerns surrounding the US debt ceiling and reduced risks within the banking sector, may have also contributed to the adoption of this more hawkish stance.

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While the Federal Reserve's dot plot indicates the likelihood of two more rate hikes by the year's end, the market's assessment suggests a probability of less than 100% for a single rate hike this year, with expectations of rate cuts commencing as early as next year. In contrast, Federal Reserve Chair Powell stated that a rate cut would only be considered once inflation demonstrates a substantial and meaningful decline, a process that could potentially span a couple of years.

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The market's dovish pricing appears to be rooted in the perception that the Federal Reserve's inflation projections have fallen behind the actual rate of inflation experienced. Furthermore, indications from producer price inflation and import prices are already pointing to a softening in economic activity.

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Federal Reserve officials have revised their economic growth forecast for 2023 upward, while also anticipating a slower decline in inflation. They expect the core Personal Consumption Expenditures (PCE) price index to ease from its current 4.7% to 3.9% by the end of 2023, compared to the 3.6% year-on-year rate recorded in March.

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Analyzing technical charts, it is evident that the DXY index has breached a critical support level at the early-June low of 103.40, indicating the fading of the upward pressure observed over the past month. The index appears to be heading towards the April low of 100.80.

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From a trend perspective, the US dollar has been in a downward trajectory since the beginning of 2023, as indicated by color-coded daily charts based on trending and momentum indicators. This trend is further corroborated by the sequence of lower highs and lower lows observed since late 2022.

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The subsequent support level lies at the 200-week moving average, currently positioned around 98.20. Unless the index manages to surpass the substantial resistance at the March high of 105.90, the prevailing path of least resistance for the US dollar remains sideways to downward.

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