USD Rally Marches On

The US Dollar rally this week has been a thorn in the side of many USD bears. Following the correction lower in July, the Dollar index has since regained its upside momentum and has broken out to new 2022 highs, taking the index back to prices not seen since early 2002. Along the way, there have been many calls for a deeper correction with bears claiming that the upside rally is overextended and vulnerable to a clear-out. However, the key driver of recent market action is market pricing for the upcoming September FOMC.

Traders Split on Fed

With the next Fed rate decision fast approaching, traders have really struggled this time around to land on either a smaller .5% hike or a larger .75% hike. Over the first half of July, a softer CPI reading and negative Q2 GDP reading slotted nicely into calls for the Fed to slow down on the pace of tightening in September. However, a firmly hawkish set of July FOMC minutes, and a slew of hawkish Fed commentary since (including Powell’s Jackson Hole speech) has seen bulls regaining confidence. Recent data surprises (NFP beat, ISM manufacturing and services beat) have also helped lift sentiment in USD ahead of the meeting, driving the current rally.

Larger Fed Hike Not Yet Priced In

Looking at the CME group market pricing for the September meeting, traders are now once again leaning towards a larger .75% hike, priced at 70%. This pricing (which is where it was at the start of last week) had been as low as 55% earlier this week, reflecting the ongoing battle.

However, the big takeaway here is that a larger hike is not fully priced in. With that in mind, there is plenty of room for USD to rally further on the back of the September meeting. At the very least, there is room for USD to rally more heading into the meeting if traders start to move towards fully pricing in a larger hike. Today’s Fed commentary will be key to watch. If we hear a solid set of hawkish comments today, that might well seal the deal, driving USD firmly higher into the meeting. At that point, the post-meeting reaction will depend on the outlook and guidance from the Fed.

Technical Views


This pair has been one of the best vehicles for USD longs this year given the divergence between the Fed and the BOJ. Following the breakout from the bull flag, USDJPY has since broken above the former 2022 highs at 139.56 and is now fast approaching a test of the long term bull channel top and the 146.97 resistance level. While above 139.56, the medium term outlook remains bullish.