Dollar Correction

The US Dollar has softened into the middle of the week following a breakout move in the DXY which saw the index trading up to its highest levels since November earlier this week. Speaking yesterday, Fed’s Mester signalled that the Fed will likely feel comfortable to begin cutting rates later this year if the economy evolves as expected.

Mester – Fed in No Rush to Ease

However, the Cleveland Fed president warned that the bank is in no rush to ease rates and outlined the risks of moving too soon. Looking ahead, Mester stuck to her view that the Fed will cut rates three times this year, consistent with her latest dot plot forecast submitted in December.

Mester’s views echo those of Minneapolis Fed president Kashkari who signalled earlier this week that while solid progress had been made on inflation there was still more to do. Kashkari again stressed that the Fed was in no rush to ease rates which was essentially the takeaway from last week’s FOMC meeting.

Fed Speak & Treasury Auctions Due

Still, despite this pushback against near-term rate calls, USD is coming under pressure this week from a slide in US yields. With solid uptake on a midweek treasuries auction, yields have softened taking USD with them. Looking ahead today we have a slew of further Fed speakers due along with the 10-Y auction. Given the current USD/Yield dynamic, a further drop in yields today will keep USD pressured.

Technical Views

DXY

The rally in the index looks to have run out of steam for now just ahead of testing the 104.95 level. With momentum studies softening, some further corrective action looks likely. However, while price holds above the 103.48 level, the focus remains on a continuation higher and eventual breakout.