Week Ahead: Hawkish “Fed speak” may lift USD Index to fresh two-year high

Hawkish Fed officials, fresh out of the just-concluded FOMC meeting, are set to swoop in en masse on global financial markets in the coming week.

Traders and investors worldwide will be closely monitoring the slew of speeches by officials out of the world’s most influential central bank, amid these other major economic data releases and events in the final days of Q3 2022:
Monday, September 26

• EUR: Germany September IFO business climate and expectations
• EUR: ECB President Christine Lagarde speech
• USD: Speeches by Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Loretta Mester

Tuesday, September 27

• CNH: China August industrial profits
• USD: Speeches by Fed Chair Jerome Powell, Chicago Fed President Charles Evans, St. Louis Fed President James Bullard
• Brent: OPEC to publish World Oil Outlook

Wednesday, September 28

• AUD: Australia August retail sales
• EUR: ECB President Christine Lagarde speech
• US crude: EIA weekly oil inventory report
• USD: Speeches by San Francisco Fed President Mary Daly, Atlanta Fed President Rafael Bostic, Chicago Fed President Charles Evans

Thursday, September 29

• NZD: New Zealand September consumer confidence
• AUD: Australia August job vacancies
• EUR: Germany September CPI, Eurozone September economic confidence
• USD: US weekly initial jobless claims, 2Q GDP (final)
• USD: Speeches by Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly
• Nike quarterly earnings

Friday, September 30

• NZD: New Zealand September consumer confidence
• JPY: Japan August jobless rate, retail sales, industrial production
• CNH: China September PMIs
• EUR: Eurozone August unemployment rate, September inflation
• GBP: UK 2Q GDP (final)
• USD: Speeches by Fed Vice Chair Lael Brainard and New York Fed President John Williams
• Tesla’s AI day

Earlier this week, the US Federal Reserve signalled its intent to send US interest rates even higher than expected.

Such policy signals then spurred the US dollar onto greater heights, while dragging many of its major peers to fresh lows, including:

• EURUSD: trading below parity, lowest since 2002
• GBPUSD: trading below 1.13, lowest since 1985
• USDJPY: spiked briefly above 145, Yen’s weakest against US dollar since 1998 (before USDJPY eased back lower due to currency intervention by Japan’s Ministry of Finance).

READ MORE: Why FX markets react to central banks?

And there’s still room for the US dollar to climb even higher.

This is because, somewhat oddly, markets have yet to fully price in another 75-basis point hike for the next FOMC meeting in early November. And that’s despite the hawkish signals out of the just-concluded FOMC meeting earlier this week.

The odds for a fourth consecutive 75bps hike (at November FOMC meeting) currently stand at 85.6% at the time of writing.

And if those odds are ramped up closer to 100%, encouraged by Fed officials who continue banging on the same hawkish drums in the coming week in drilling home the message that US interest rates will continue to push higher and stay elevated for longer in the central bank’s quest to quash stubbornly-high inflation, that may well push the equally-weighted USD index to the 1.25 mark, levels not seen since the onset of the global pandemic in 2020.

Furthermore, if there’s also a ramping up of geopolitical tensions in the days ahead, that should spur more demand for the greenback as a safe haven asset.

But first, we could see an immediate pullback for this USD index, seeing as its relative strength index is on the cusp of breaking into overbought territory.