US Dollar Index: A test of the March 2021 93.45 highs is on the cards – Westpac

Chair Powell’s dovish testimony likely injects some near-term US Dollar Index (DXY) two-way. But a test of the March 2021 93.45 highs in Q3 is still on the cards as taper talk rises to a crescendo into Jackson Hole, economists at Westpac appraise.

Fed closer to its inflation objectives than the ECB

“Chair Powell’s testimony tripped up the DXY with the message that achieving substantial progress and a withdrawal of support are both still a way off. But that doesn’t alter the picture of an economy that is more convincingly finding its feet. With a more secure ‘post-covid’ growth path unfolding, Covid-related job losses should be recouped in a more consistent fashion going forward.”

“The puzzling fall in US yields complicates the constructive USD outlook, but it’s mostly a curve flattening story and a recalibration of inflation expectations following the Fed’s hawkish pivot. In any case, the ECB is reinterpreting its price stability mandate and shifting to a structurally more dovish policy stance.” 

“Chair Powell’s more cautious message likely injects some two-way risk into DXY near-term but a test of the March 2021 93.45 highs remains more likely than not as taper talk rises to a crescendo in Q3.”

“We expect a clear Fed taper signal at the August Jackson Hole symposium and a formal announcement in September. Tapering should commence early 2022 and be complete in six months, a much speedier profile that is likely to leave DXY well supported.”