DXY inter-markets: extra gains hinge on Yellen

The US Dollar Index (DXY) – which tracks the buck vs. its main competitors – seems to have recovered the smile following Friday’s sharp drop, managing to keep the bid tone during the first half of the week for the time being.

The bullish, albeit tepid, note remains well and sound around the buck, always backed by firm expectations of a rate hike by the Federal Reserve at tomorrow’s meeting. According to CME Group’s FedWatch tool, the probability of a 25 bp hike stands just above 94% based on Fed Funds futures prices.

US yields are confirming the upbeat sentiment around the FOMC meeting as well, managing to gravitate around YTD tops along the curve and lending extra legs to the greenback.

However, with a hike tomorrow being a ‘done deal’, market participants will focus on the ‘dots plot’ and the likeliness of extra tightening in the months to come. It is worth recalling that Fedspeak in past weeks emphasized the economy needs higher rates and even a couple of FOMC governors slipped the chance of 4 rate hikes this year (vs. 3 hikes projected back in December).

Hence, investors will closely follow Yellen’s press conference following the FOMC decision tomorrow, looking for clues on the future rate path and potential moves by the Fed later in the year.

A more hawkish approach by the Committee should reinforce the Dollar’s up trend, paving the way for another test of the 102.00 mark and opening the door for a re-visit to the critical resistance band around 102.30.