Weekly Market Review, w/c 21st September - Will Rate Hikes Drive the Dollar Higher?
Rating: Tightening Regime | Bias: Dollar Bullish Fundamentally, Correction Expected Technically
The Big Picture
Three central banks, three hikes, one driver. The Fed, the ECB and the Bank of Japan have all tightened, and energy prices sit behind all of it. This is now a synchronised tightening cycle rather than a series of isolated decisions, and it reframes how every asset on the watchlist needs to be read.
Where it gets interesting is the gap between the fundamental picture and the technical one. Fundamentally the dollar has every reason to go higher. Technically the upside looks limited from here. That tension is the hinge for most of this week's positioning, and it is why several of the trades below are set up as corrections rather than trends.
Where Rates Now Sit
The Fed raised 25bp on 16th September to a target range of 3.75% to 4%, its first hike since July 2023. The vote was unanimous at 12-0. The dot plot did the real talking: 16 of the 18 officials who submitted projections expect another increase before year end, with year-end projections clustered between 4.1% and 4.4%. Warsh has still not submitted a dot of his own. Markets are pricing one more hike in December.
The ECB moved on 10th September, lifting the deposit rate to 2.50%. That decision was unanimous and Lagarde called it a no-brainer.
The BoJ followed on 18th September, raising to 1.25% from 1.00%, the highest since 1995. That vote was not unanimous, splitting 7-2 with Asada and Sato dissenting. The pace has quickened too, arriving three months after the June hike rather than the six month interval the market had grown used to.
Worth noting what happened next, because it cuts against the obvious read. The yen fell rather than rose after the BoJ hike, with USD/JPY pushing back above 157. Two dissents and no commitment to further moves from Ueda were enough to undo the hawkish signal. A hike being delivered does not guarantee the currency follows.
The Key Theme: Rates and the Dollar
Everything this week runs through the interest rate and dollar channel. The fundamental case for the dollar is straightforward. The Fed is at 4% against the ECB at 2.5% and the BoJ at 1.25%, the rate differential is wide and the dot plot points to it widening further. That should support the dollar.
The technical case says the easy part of that move has happened. DXY rallied to seven week highs immediately after the Fed but has since stalled, sitting around 100.22 with yields easing back. The setup looks like a correction rather than a continuation. Fundamentally bullish, technically limited, which is an uncomfortable combination and the reason for the corrective framing on the trades below.
The Russell 2000 is the cleanest expression of the rate impact on equities. Small caps carry the most floating rate debt and feel funding costs first. In a confirmed tightening cycle with another hike penciled in, this is the index with the most to lose.
The Trades
Gold. Fundamental Buy, Technical Buy.
The only position this week where both sides agree, which is worth something on its own. Gold dipped to around $4,310 immediately after the Fed, then rallied more than 2% the following day as oil prices fell and yields dropped back. It shrugged off the hike within twenty four hours.
The fundamental case rests on the dollar. If DXY fails to hold its post-Fed gains, gold gets a direct tailwind. Geopolitical demand continues to limit the downside even when rates argue against it. The technical picture confirms. Highest conviction setup of the week.
Russell 2000. Fundamental Short, Technical Short (Correction).
Fundamentally exposed to higher funding costs with another hike likely before year end. Technically set up as a correction rather than a trend reversal, so the framing matters. This is a move within a structure, not a call for a collapse.
EURUSD. Fundamental Short, Technical Short (Correction, Limited, Ending Diagonal).
The rate differential favours the dollar, with the Fed at 4% against the ECB at 2.5%. That is the fundamental short case.
Technically the picture is more nuanced. A potential ending diagonal is forming, which by definition signals exhaustion rather than continuation. The downside from here looks limited. If DXY fails, this is the pair most likely to reverse sharply to the upside. Short with a short leash.
DXY. Fundamental Buy, Technical Short (Correction).
The position that explains the rest of the book. Long term fundamentals point up, near term technicals point to a correction. Trading the correction while respecting the underlying trend.
The important thing is that the gold and EURUSD positions are both hedged against this. If DXY corrects lower, gold benefits and EURUSD reverses. The book is internally consistent either way, which is the point.
What to Watch
PCE print, 30th September. The Fed's preferred inflation gauge and the next real test of whether the dot plot holds
December Fed meeting. Markets pricing one more hike, 16 of 18 officials agree. Any wavering there hits the dollar directly
DXY around 100. Whether the post-Fed high holds or fails determines the gold and EURUSD outcomes
EURUSD ending diagonal. Watch for the pattern completing. That is the reversal signal
Oil. It drove all three hikes. If energy prices ease, the whole tightening narrative softens
BoJ, 29th to 30th October. The Outlook Report matters more than the rate. A hawkish tone lifts the yen, caution keeps the carry trade running
These are my views based on my own analysis at the time of writing. Nothing here is financial advice. Always do your own research and manage your risk.
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