Dollar back in demand, but not for long

Summary

• The US Dollar posted strong losses following the dovish remarks and forecasts from the FOMC at the March 16th meeting

• The Fed lowered its rate hike expectations from four to two

• The following week, FOMC members came out strongly in support of further rate hikes

• US Dollar Index technical charts point to a downside which is likely to see EURUSD post new highs over the coming months

Just a week after the Federal Reserve surprised the markets with a strongly dovish tone, citing global concerns and continued low inflation run in the US. Interest rates were kept steady and the Fed lowered its rate hike forecasts from four to only two for 2016, but the markets expected that. What was not priced in was the dovish tone of the Fed's language which sent the Dollar weaker across the board. By the market close, EURUSD rallied over 1.0%, closing above the $1.12 handle.

The following week however, the US Dollar started to rebound across the board. In the week of March 21st, Federal Reserve members, Lacker, Lockhart, Evans, Harker, Bullard all came out strongly hawkish in support of rate hikes, with some expecting rates to rise as early as the April FOMC meeting.

It is unlikely that there will be a rate hike in April considering that the event does not follow up with any press conference, often considered supportive especially when a major policy decision as hiking interest rates is made. This leaves the markets to look to the June FOMC meeting for the next likely meeting where the Fed could raise rates. The CME Group's FedWatch has a 38% probability for a rate hike. Of course this could change in the course of the next few months as the markets will see at least NFP reports as well as estimates on the first quarter GDP data from the US.

Manufacturing continues to remain a soft spot with recent economic data sending mixed signals, while housing markets have also started to show signs of weakening.

US Dollar Index - Where to from here?

After multiple attempts to break free of the 100 psychological level and failing, the US Dollar eventually gave up and started to trend lower since February this year with prices falling to 95.0 briefly before stabilizing, thanks to the hawkish comments from the Fed members. However, the upside momentum is likely to slowly ease as prices tread closer to the 97.6 - 97.3 resistance, marked by the lows around the week of 7th December 2015. As long as this resistance holds, the US Dollar Index is likely to decline lower with the lower support at 93.13 - 92.6 coming into play.

How prices will react to this lower support will be important as it could shape the outcome over the next few months. Below the support at 92.6 - 93.13, the next lower support comes in near 89 - 90 level which is a minor resistance level that was eventually broken within a few weekly sessions.

With the Dollar Index poised to trade below the 97.6 - 97.3 levels and biased to the downside, EURUSD is a currency pair that is worth watching. Given that the ECB has for now exited the currency wars and no recent speeches by ECB members referencing the exchange rates, EURUSD could likely seek more gains in the backdrop of the current environment. EURUSD has formed a strong ‘V’ shaped reversal with resistance at 1.134 - 1.135 established. A break above this level will likely propel the single currency towards August 24th 2015 highs of 1.16.