USD: Downside Trend on Pause?

<p>The US Dollar hit a serious obstacle during decline on Monday which apparently helped bulls to gain control on Tuesday. A convenient explanation of this pullback is the process of pricing in the uncertainty related to the Fed’s meeting outcome on Wednesday. The US Central Bank has already signaled that it is unwilling to make “liquidity bazooka” a permanent feature of its policy quickly and quietly reducing bond purchases to a minimum:</p>
<p><img class="alignnone size-large wp-image-44987" src="http://blog.tickmill.com/wp-content/uploads/2020/06/1-3-1024×764.png" alt="" width="1024" height="764" srcset="https://blog.tickmill.com/wp-content/uploads/2020/06/1-3-1024×764.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/06/1-3-300×224.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/06/1-3-768×573.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/06/1-3.png 1113w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>… with market participants apparently turning their focus and demand to the repo market:</p>
<p><img class="alignnone size-large wp-image-44988" src="http://blog.tickmill.com/wp-content/uploads/2020/06/2-2-1024×309.png" alt="" width="1024" height="309" srcset="https://blog.tickmill.com/wp-content/uploads/2020/06/2-2-1024×309.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/06/2-2-300×91.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/06/2-2-768×232.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/06/2-2.png 1328w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>One way to understand why the FOMC meeting in June can offer really strong support to USD is to notice that macroeconomic situation in the United States has improved significantly since the last meeting, and it may seem that this recovery is becoming less and less consistent with various emergency programs of asset purchases, zero interest rate, credit facilities that the Fed has been rolling out since mid-March. Here we can also include purchases of commercial papers, corporate ETFs, support for the “fallen angels”, credit facility for the so-called “Main Street” (i.e. small firms) which played key role to keep interest rates subdued in corporate financing markets. Robust stock market growth hinges a lot to the expectations that this cheap liquidity will remain in place. Expectations for QT or at least a bit more hawkish stance is clearly visible in the treasuries futures market:</p>
<p><img class="alignnone size-large wp-image-44989" src="http://blog.tickmill.com/wp-content/uploads/2020/06/3-2-1024×572.png" alt="" width="1024" height="572" srcset="https://blog.tickmill.com/wp-content/uploads/2020/06/3-2-1024×572.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/06/3-2-300×168.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/06/3-2-768×429.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/06/3-2.png 1327w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>The chances of interest rate hike by 25 basis points at June meeting rose from 0% from early May to 16%. It is reasonable to assume that these expectations are also priced in USD, so if the Fed makes it clear tomorrow that it does not share the optimism of the latest data, this will signal to market participants that the easing bias is still here which is negative for USD. And vice versa.</p>
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