Loss of Fed’s Credibility to Hurt The U.S. Dollar?

A new trading week kicks off and top event risk will be the FOMC rate decision on Wednesday.

The Federal Reserve’s abrupt departure from being patient on inflation which was still considered ‘transitory’ just a few months ago to panicking on inflation with a current probability of four rate hikes in 2022 results in a loss of credibility. While a March rate hike is almost a done deal to control the ‘previous transitory’ price pressures, a majority of economists predicted the central bank will use its January meeting to deliver a 25 bp or even a surprise 50 bp rate hike which would be the largest since 2000. Speculation about five rate increases this year is also on the table.

What will the Fed’s rapid shift mean for the U.S. dollar?

As we could see, U.S. dollar bulls seemed to be largely unimpressed by the Fed’s hawkish turn with the greenback experiencing even a drop against other counterparts. In the face of the central bank’s losing credibility, we could imagine that the U.S. dollar is at risk of dropping despite the Fed’s accelerated rate hike path.

Technically, both EUR/USD and GBP/USD look oversold in daily time frames which could lead to short-term upward movements. However, bulls should take a cautious approach as risk trends can slip. Current resistances are seen at around 1.37 in the GBP/USD and at 1.1430 in the EUR/USD. Bear in mind that dollar bulls could pile in ahead of the FOMC announcement but might take any potential profits quickly.

Apart of Wednesday’s FOMC decision we will have the 4Q U.S. GDP Thursday and the PCE deflator (the Fed’s favorite inflation indicator) Friday.

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