DXY Eyes Powell Testimonial, Economics

US Dollar Fundamental Forecast: Neutral

  • The US dollar hit new highs after an eventful week of trading
  • Federal Reserve Rate Hike Bets, Economic Forecast Will Dictate DXY Strength
  • Powell’s Congressional testimony could see US dollar volatility ahead

The US dollar hit a new high in 2022 ahead of the Federal Reserve’s interest rate announcement, with the DXY index hitting 105.78 before paring gains and ending lower this week. A volatile geopolitical landscape, volatile equity markets and the threat of lingering inflation have contributed to the greenback’s ascent over the past few months. The possibility of a decline in geopolitical tensions seems untenable at present, given the raging conflict in Ukraine.

However, markets may reassess the dollar’s position over the coming week as traders assess the health of the market and the likelihood of a recession. The FOMC’s 75 basis point rate hike has eased some inflation fears, but the threat of slowing economic growth is now weighing heavily on sentiment, especially with market bets showing a good chance for another hike 75 basis points at the July meeting. The Fed seems willing to sacrifice economic growth to temper prices.

As recession fears come and go, so does the dollar, given its safe-haven status. The Atlanta Fed’s GDPNow model forecasts real gross domestic product (GDP) growth of 0.0% in the second quarter as of June 16. The next model update is scheduled for June 27. Upcoming U.S. economic events such as existing home sales, MBA mortgage applications, consumer sentiment, and initial jobless claims will be front and center in assessing the health of the U.S. economy during of the coming week.

The dollar’s main focus, however, is testimony from Federal Reserve Chairman Jerome Powell. The central bank chief is expected to deliver his semi-annual monetary policy address to Congress. Mr. Powell will speak before the Senate Banking Committee on June 22. Lawmakers will likely ask questions about the pandemic response and the overall strength of the U.S. economy. The greenback could rise if Powell confirms already strong expectations of further tightening.

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

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