USD/CHF: Dollar undermined by dovish Fed

So, the Federal Reserve successfully helped to inspire a stock market rally that helped to push the major US stock indices to new highs for the year, while the Dollar Index was pushed back to its early January lows. We had already anticipated that the Fed and its chairman Jay Powell may very well deliver a dovish surprise and as it turned out, that was indeed the case. This should not have come as surprise, but the markets’ reaction suggests that the Fed was perhaps significantly more dovish than had been anticipated. All of a sudden, the central bank’s focus has shifted from a bias towards hiking rates to a completely neutral and data-dependent outlook. The FOMC will now be “patient” in determining future “adjustments” to interest rates given “muted inflation pressures.” Reading in between the lines, the Fed may even lower interest rates should the economy deteriorate, as “adjustments” could mean a rate increase but also a cut. Mr Powell also confirmed reports that the Fed is evaluating its balance sheet strategy and will be finalising plans at the coming meetings. Read our full FOMC recap by my colleague Matt Weller HERE.

Nonfarm payrolls in focus next

The focus will now turn to the US jobs report on Friday. However, the employment report will probably not be too significant in terms of its potential market impact as investors will still be assessing the Fed’s apparent U-turn in its monetary policy stance. Given the renewed weakness for the dollar, if the jobs and wages data were to disappoint expectations badly then this will further reinforce the Fed’s cautious outlook on the economy and reduce the possibility of rate increases even further. However, a positive surprise will probably not cause too much of a reaction as investors are aware that the jobs markets has already been a strong point of the economy. In other words, we expect the dollar to respond more significantly to poor than positive data.

Gravestone Doji for USD/CHF

Among the dollar pairs, the USD/CHF is looking rather interesting. If you recall from last week HERE, we had anticipated this pair to drop to 0.9910 after it had formed a bearish engulfing reversal candle on its daily chart. While it got to that target, the selling pressure then stopped as the USD/CHF rebounded along with global stock markets. But after yesterday’s FOMC statement and press conference, the Swissy has created another interesting formation, this time a so-called “gravestone doji” candlestick pattern. This is a bearish reversal pattern formed when the open, low, and closing prices are all near each other, and with a long upper wick. The long upper wick suggests that the bullish momentum in the early part of the session yesterday was overpowered by selling towards the end of the session. With the bulls suffering another technical blow here, this time rates may break decisively below that 0.9910 support. If so, then it could quickly drop to 0.9855 next, which is a prior resistance level. All bets would be off, however, should we see a break above parity (1.00) in the coming sessions. It could get there, if, for example, the US jobs report on Friday smashes expectations with a massive headline print and a decent rise in wages.

Source: TradingView and FOREX.com.

Related tags: FOMC Forex USD/CHF Forex

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