USD/CHF slides under 0.9200 as dollar longs flushed out after hot CPI fails to spur fresh hawkish Fed bets

Amid what appears to be a large flushing out of dollar long positions after the latest US inflation report failed to spur fresh hawkish Fed bets, USD/CHF has slumped from the mid-0.9200s to underneath 0.9200 in recent trade. On its way lower, the pair has broken below a key uptrend that had been supporting the price action so far in 2022, its 50-day moving average at 0.9215 and its 21-day moving average at 0.9196. That means the door is open for a retest of the last weekly lows at 0.9180 and a test of the 200-day moving average in the 0.9160s. At current levels in the 0.9180s, USD/CHF is trading lower by about 0.5% on the day, having now reversed a full percent lower from Tuesday’s near-0.9280 peaks.

The dollar’s loss of bullish momentum which had seen it rally from near-0.9100 at the start of 2022 to this week’s highs near-0.9280 began after Fed Chair Jerome Powell failed to spur fresh hawkish Fed bets in wake of his testimony on Tuesday. Though the Fed Chair, who was speaking at his renomination hearing before Congress, endorsed the idea of multiple hikes in 2022 and a start to quantitative tightening, his tone didn’t deviate much from the December Fed meeting or its minutes. Traders seemingly took this as a green light to take profit on long-held USD bullish positions and, despite headline CPI on Wednesday showing inflationary pressures reached their highest level since June 1982 at 7.0% in December, the latest inflation report seems to have been interpreted the same way.

Looking at the DXY from a technical perspective, with the index having now broken below key support in the 95.50 area, the current pullback has some room to run. The next area of significant support is in the 94.50 zone. A drop back to these sorts of levels suggests that USD/CHF could be headed back for a test of Q4 2021 lows in the 0.9100s. This would be a very attractive level for longer-term USD bulls betting that the hawkish Fed will ultimately push US yields and the US dollar higher to reload on longs.

Whilst not the case on Wednesday, in the long-run high US inflation is likely to benefit the buck. And as ING put it, “the risks are likely skewed towards higher for longer inflation with the Federal Reserve ending up responding more aggressively to keep it in check.” “After all,” continues the bank, “labour costs are accelerating, companies have pricing power, Asia lockdowns in response to a zero-Covid policy risk prolonging supply chain strains while inventory rebuilding could keep demand outstripping supply for a good while yet.”