• The US dollar has been in the hands of the bears despite an ultra-hawkish Fed.
• The four-hour chart is bullish with risk of a deeper retracement towards a 50% average return towards 103.267.

At 102.868, the DXY index is down 1% and fell from a high of 103.877 to a low of 102.657, extending its pullback from a two-decade high on the final day of the week. The greenback fared poorly against riskier currencies, as measured by the DXY Index, which tracks the greenback against six major currencies, falling to its lowest since May 5.

The index hit a nearly two-decade high last week as a hawkish Federal Reserve and growing concerns about the state of the global economy helped push the greenback up around 7.5% for the year so far. However, there is a feeling that the US is heading into a recession and a hard landing may not be favorable for the greenback.

Nonetheless, Fed officials remain hawkish and there have been a slew of speakers this week, including the Fed Chairman whose comments during an interview with The Wall Street Journal were the most hawkish yet. He said the Fed will need to slow growth to bring inflation back to its 2% target. Rising interest rates will tighten financial conditions, which will affect the economy, but he warned, “we don’t have precision tools.” “It could be painful,” he said, “but we believe we can maintain a strong labor market, defined as a labor market where unemployment is low and wages are rising.” “It may not be the perfect job market, but it will be a strong job market,” he added.

His remarks were followed on Wednesday by the Fed’s Charles Evans saying the Fed will likely raise rates above neutral. “If we go beyond 50 basis points, if we go beyond 75 basis points, then this restrictive policy framework should help bring inflation down.” Evans added that “My own assessment of ‘neutral’ is between 2.25 and 2.5 percent.”

The Fed’s Patrick Harker also commented yesterday and said, “We don’t want to overdo it. But we must act and we are acting. He added that the United States might have a few quarters of negative growth, but that’s not what he expects. Finally, Harker said the Fed could engineer a “safe” if not “soft” landing for the economy.

On Thursday, Kansas City Fed’s Esther George noted that financial conditions were beginning to tighten and said it would take “something very different” to support larger rate hikes. George added that she was very comfortable with rate hikes of 50 basis points.

In this regard, analysts at ANZ Bank said that ”tighter financial conditions are of course necessary to reduce demand and lower inflation, the rate at which financial conditions have tightened could push back a rate hike 75 basis points next month, unless of course the consumer price index and labor market data are unusually strong. A key question, however, is how quickly will labor demand slow?”

Meanwhile, today’s weekly initial claims showed early signs of an upward trend from their record lows in March, which analysts at ANZ Bank said “may be a very early that the demand for labor starts to calm down a bit”. But that’s just the beginning, and with 1.9 job openings per unemployed worker, the US labor market remains extremely tight.

Turning to yields, US bond yields fell and the yield curve steepened as investors continued to gravitate towards safe assets after yesterday’s selloff in equities. Yields on 2-year government bonds rose from 2.68% to 2.58%, and yields on 10-year government bonds rose from 2.90% to 2.77%.

US Dollar Technical Analysis

The four-hour chart is bullish as price corrects from lows in an overextended M formation, opening the risk of a deeper retracement towards a 50% average return towards 103.267.