US Dollar Forecast: FOMC Chairman Warsh Sworn In - Good Luck Kevin!

US Dollar, FOMC Key Points

• Kevin Warsh was sworn in as the 17th FOMC Chairman, but he will have trouble convincing the rest of the committee to cut interest rates.
• The labor market remains resilient, and potentially accelerating, whereas inflation is trending further away from the central bank’s 2% target.
• The US Dollar Index (DXY) could be the beneficiary of rising US interest rates, with potential for a quick rally toward 100.00 if the near-term range high at 99.50 is eclipsed.

In otherwise quieter, pre-holiday weekend trade, Kevin Warsh was sworn in as the 17th FOMC Chairman in the institution’s 113-year history.

As President Trump’s handpicked successor to Jerome Powell, Warsh will undoubtedly face political pressure to cut interest rates; the problem is, from a monetary policy perspective, it’s near impossible to make a coherent case for cutting interest rates in the current macroeconomic climate. Defying expectations, the unemployment rate has remained relatively low, and the most recent NFIB Small Business Optimism survey suggests that, if anything, the US labor market is reaccelerating:

Source: NFIB

At the same time, the other half of the Federal Reserve’s dual mandate, inflation, is clearing heading in the wrong direction. Regardless of which inflation measure you’re tracking, prices continue to hold above the central bank’s 2% target, and the ongoing conflict in Iran suggests that price pressures are likely to increase over the coming months, even if we see the Strait of Hormuz reopen immediately.

Source: TradingView

Against this backdrop, traders have start to price in the potential for (at least) one interest rate hike in the coming year, with the CME’s FedWatch tool showing a 20% chance of two or more 25bps interest rate increase by the end of next April:

Source: CME FedWatch

While Warsh is likely to remain more reticent to raise rates than the median FOMC member given the circumstances of his appointment, the winds have shifted in a decidedly hawkish direction over the last few months. In any event, the Fed is likely to hold interest rates in the current 3.50-3.75% range through the summer barring a surprise, but at a certain point, even the most ardent dove will be forced to bow to the data. Good luck Kevin!

US Dollar Technical Analysis: DXY 4-Hour Chart

Source: Tradingview, StoneX

Turning our attention to the charts, higher US interest rates would be expected to support the world’s reserve currency, all else equal. The US Dollar Index (DXY) has been lagging the rally in 2-year Treasury yields (a proxy for near-term FOMC interest rate expectations) since the start of the month, hinting at the potential for a “catch-up” trade to the topside as we head toward June.

From a technical perspective, the US Dollar Index has carved out a sideways range between about 99.00 and 99.50 over the past week and a half, with a symmetrical triangle pattern forming within that zone over the course of this week. The rangebound trade has allowed the world’s reserve currency to correct its overbought condition through time, rather than an outright price correction, a bullish development that hints at another leg higher if 99.50 is eclipsed.

In that scenario, a quick rally toward the psychologically-significant 100.00 level would be the higher-probability development to watch, whereas a bearish breakdown below 99.00 would invalidate the bullish setup and point to a deeper retracement toward 98.50 next.

-- Written by Matt Weller, Global Head of Research

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