ECB, FED, and BOE, the major central bank members using the word “transitory” for inflation for months. But it turns out inflation was not temporary at all. Yesterday, Powell said that it is time to retire the “transitory” word. But what is that mean for the humble forex traders and the dollar index?
For the fundamental side, it did not change a lot of things that the markets haven’t priced in yet. The market participant is aware of the inflation but Powell’s acceptance means faster tightening for the FED both asset purchases and rate hikes unless the economic outlook stays the same. Some of the FED members already talked about the faster tapering including vice president Clarida. A decision in December FOMC is highly likely.
Meanwhile, most of the ECB members and president Lagarde are still on the “transitory” train. The last time the two central banks differs too much was in 2014 and the dollar index rise more than %25 that time. But the dynamics of that time were different. ECB was starting asset purchases under the guidance of Draghi while FED was starting tapering after a long time of asset purchasing period under the guidance of Bernanke.
If ECB insists on staying extra dovish while FED begins rate hikes, the dollar index may rise 5 to 10 percent over the medium to long term. But a change of tone from the ECB forward guidance may change the current FX outlook completely.
As for the technical outlook, the upswing from the 89 support to the 103 resistance may resume with Powell’s speech over the medium term. As for shorter periods, 95.300 will be the key support and 96.375 – 97,550 – 99 levels will be the major targets for upward moves (values will increase with time because of the positive slope of the trend).