May Fed Meeting may Trigger Dollar Sell-off and Here is why

may-fed-meeting-may-trigger-dollar-sell-off-and-here-is-why

Bearish pullback in the major USD rally failed to gain traction on Monday as buyers stepped up with bids ahead of the Fed meeting on Wednesday, at which the Central Bank is expected to raise rates by 50 bp and outline a plan to sell assets off the balance sheet. The dollar index (DXY), having corrected from a 5-year high of 104 to a 103 handle, looks set to retest the multi-year high.European indices fell by inertia on Monday on concerns that Friday US equity sell-off which erased 3.5% on average will extend to today’s price action. Goldman said that the room for further decline appears to be limited, pointing to the extreme level of bearish sentiment, the end of buyback blackout period and the upcoming rebalancing of pension funds in favor of equities as the key reasons to expect a U-turn. US indices opened higher today helping to relieve concerns that the sell-off will continue this week. The US fixed income market is in a good mood, investors did not rush to buy bonds on Friday despite the surge in risk aversion, today the yields are again pressed against the main resistance levels (3% on 10-year and 2.75% on 2-year Treasuries):The EU economy, in contrast, continues to upset Euro bidders: consumer confidence, economic and industry sentiments fell short of modest forecasts in April. The German PMI in the manufacturing sector indicated a slowdown in the pace of output and new orders, the corresponding index fell into contractionary territory for the first time since the first half of 2020 (when lockdowns were in full swing):Retail sales in Germany were also disappointing in April, the growth amounted to -0.1% against the forecast of 0.3%.For the ECB, the problem is that the negative data is combined with record inflation expectations from both sellers and consumers. Some ECB officials have already hinted that they are ready to vote for a rate hike in July, if the rest of the Governing Council members go over to the side of the hawks and begin to prepare the markets for this, we can expect EURUSD to find at least some meaningful support.Otherwise, there will most likely be a new low for the pair, especially if the Fed does not deviate from the previously indicated course at the upcoming Fed meeting. This is the interest rate at 2.75% at the end of this year (remember the last Dot Plot). But in my opinion the markets are expecting too much. In light of the uncertainty surrounding the Ukraine conflict, the risks of stagflation spilling over to the US, and China’s economic woes, the Fed will likely re-evaluate the pace of tightening and communicate this unequivocally to markets. Short-term risks for the dollar, given the extreme overbought levels at which it is currently located, are skewed towards the downside. EURUSD is poised to rebound from 1.05 with the target of 1.06-1.0650:

Source: Tickmill

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