Dollar Dominance Continues as Markets Eye Fed Rate Decision
The US dollar is expected to continue its bullish trend, with expectations of at least 25 basis points (bps) of hikes into the end of the year. The Federal Reserve's upcoming rate decision on next Wednesday will be a crucial event for the markets.
The USD/JPY pair remains key for FX markets as it presents significant USD risk, which can drive through other markets such as EUR/USD, GBP/USD, and AUD/USD. The crowded carry trade has driven the pair's price action in recent years, with US CPI prints having a massive impact on its movements.
A below-expected US CPI print in November 2022 led to a sell-off of over 2,000 pips, and similar data this week could lead to a bounce or reversal in the market. The Bank of Japan's intervention has been a key factor in the pair's price action, but it remains to be seen if longs will bail out at the current level.
In other markets, EUR/USD seems to have already priced in the ECB's expected 25bps rate hike, while GBP/USD presents an inverse head and shoulders pattern that could lead to a clean backdrop for USD-weakness. Gold has not responded positively to recent events, but buyers can still make a statement if they push above $4435.
The S&P 500 has responded positively to the pullback, with price moving up to key support levels and providing motive for bullish biases. However, a shocking inflation print later in the week could strengthen rate hike expectations and drive a pullback in equities.