U.S. Dollar bears have been surprised this week as the Fed’s continued hawkish stance, as shown by the FOMC minutes, led to a nearly 0.51% gain in the U.S. Dollar Index (DXY). And it looks like this resilience may be set to continue.
The Fed’s Hawkish Stance Continues
The minutes from the most recent FOMC meeting indicated that the Fed was not only maintaining higher rates but some officials were also receptive to the idea of raising rates in case of a pick-up in the pace of inflation. The Fed’s stance comes as inflation data came in far from the Fed’s stated 2% goal for the third consecutive time.
Interest rates are currently hovering at their highest level in over 20 years. The Fed’s stance caught USD bears off guard as only a few weeks ago the market had cheered potential indications of rate cuts from the Fed.
Recently, Fed Governor Christopher Waller noted that the Fed does not need to slash rates this year if inflation does not recede to anticipated levels. The key risk for the Fed is that if it embarks on rate cuts too soon, inflation will keep flying higher. Notably, Michael Barr, the Federal Reserve Vice Chair of Supervision, commented that the inflation reading in the first quarter was disappointing and failed to provide confidence to chart a course toward easing monetary policy.
What Is the Outlook for the Dollar Index?
As a result, the DXY could continue to display strength, although the 106 level is likely to act as a key point of resistance for dollar bulls in the short term. Meanwhile, the European Central Bank looks set for a quarter-point rate cut next month. In contrast, a rate cut in the U.K. looks out of the question as the country gears up for a general election in July. This means the gains in the pound could continue.
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