US Dollar's Downtrend Continues Despite High Rate Hike Expectations
Despite high expectations for a rate hike from the Federal Reserve, the US Dollar took a hit this week. The Fed's building momentum was reflected in consumer price index (CPI) numbers, which came in at 3.4% for headline and 2.4% for core inflation. However, the European Central Bank (ECB) hiked rates by 25 basis points, but it didn't cause a significant reaction in EUR/USD.
One of the main factors affecting the US Dollar is the USD/JPY carry trade. This week's intervention by US Treasury Secretary Scott Bessent, who stated he had access to asymmetric information and would know what the Bank of Japan will do next, likely played a significant role in the matter. The reversal of this crowded trade could lead to a larger decline.
Looking at longer-term charts for USD/JPY, it's evident that bears have taken control recently. This is highlighted by the 'up the stairs, down the elevator' pattern seen over the past four years. In contrast, DXY, which measures the US Dollar Index, remains below its 2021 high and has been in a downtrend since.