DXY: Wakeup call from a hawkish Fed – OCBC

FX markets received a wakeup call from a hawkish Fed, with USD up over 1% overnight post-FOMC. December seasonality of US Dollar (USD) softness doesn’t seem to apply for Dec-2024 so far. The Dollar Index (DXY) was last at 108 levels, OCBC’s FX analysts Frances Cheung and Christopher Wong note.

USD can weaken from current highs

“The last time we saw an up month for December was about 8 years ago in 2016. Precious metals were the worst hit, with gold under 2600 at one point overnight. This is consistent our near-term challenging outlook for gold, given the risk of Fed slowing pace of cuts. To recap, FOMC guided for a slower pace of rate cut for 2025 and even 2026 (2 cuts each year). The quantum of rate cuts has also been reduced for the cycle.”

“Although markets have earlier anticipated for 2 cuts, the hawkish outcome saw further hawkish re-pricing. Markets are now not fully pricing another cut until July or Sep with only 32bp now priced for whole of 2025. In other words, markets are pricing Fed to pause cut cycle for the next 7 or 9 months – a rather hawkish stance against the backdrop of cooling labour market. That said, market pricing can be fluid.”

“If NFP comes in with slower job creation or even core PCE data comes in softer than expected, then rate cut expectations can adjust again and the USD can weaken from current highs. Daily momentum turned mild bullish while RSI rose to near overbought conditions. Not ruling out a pullback given the sharp move. Resistance at 108.20, 109 levels. Support at 107.20, 106.70 (21 DMA).”