US Dollar on its knees after the Fed dovish hike.

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• US Dollar on its knees after the Fed dovish hike.
• The Weekly M-formation could hamstring the downside.

Federal Reserve hikes rates by 25 bps, as expected but the Fed statement deleted reference to ‘ongoing increases’ in rates. Ahead of the decision, the money markets were pricing in a year-end target rate of 4.36%. This has dropped in volatile reactions to the statement to 4.26%.

In the Fed’s statement, the members of the Federal Open Markets Committee (FOMC) suggested it was on the verge of pausing future hikes in view of the recent turmoil in the financial sector. however, Jerome Powell vowed to commit to reining in inflation.

On top of that, we had hawkish comments by European Central Bank President Christine Lagarde on Wednesday that gave the Euro a boost when she said the ECB would take a “robust” approach to inflation risks.

Specifically, ECB President Lagarde said, “we do not see clear evidence that underlying inflation is trending downwards,” and the ECB will take a “robust” approach that allows it to respond to inflation risks as needed but also aid financial markets if threats emerge.

Consequently, the US 2-year Treasury yields were dropping from 4.259% on the day to print a low of 3.958%. The US Dollar index, DXY, fell to a low of 102.065 from a high of 103.265.

Analysts at Rabobank argued that the FOMC expects credit tightening by banks to do the rest of the inflation fighting for the central bank. ´´During the Q&A you could easily get the idea that credit tightening is the Fed’s new monetary policy tool,´´

´´Consequently, we lower our forecast for the target range of the fed funds rate to 5.00-5.25% from 5.25-5.50%. In other words, we now expect only one more hike of 25 bps instead of two.´´

However, they stick to their forecast that the FOMC will not pivot this year.

Powell speech: Recent banking events will result in tighter credit conditions

Powell speech: Before banking stress, thought we would have to raise terminal rate

Powell speech: Tightening in credit conditions may mean monetary tightening has less work to do

´´If we need to raise rates higher we will, for now we see likely hood of credit tightening.´

From a weekly perspective, the price is headed to the support zone while leaving an M-formation in its tracks. This is a bullish reversion pattern that would be expected to see the index correct back toward the neckline in due course.

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