Is FOMC Scared of a Stronger DXY? Apparently So, As They Should
DXY or US Dollar Price Forecast Focus:
- The ONE Thing: The Fed has spoken, or shaken, depending on how you look at it, and a further strengthening of the US Dollar Index here could make for one of the greater post-GFC policy flubs yet. The US Dollar remains within the range that began in August 2018, but a break above 97 with force could really put a dent in their plans to keep financial conditions easy.
- How much does the US Dollar matter? Hedge Fund consultant, Julian Brigden of MacroIntelligence2 and Tyler discuss just that and more on the DailyFX Podcast
- The big story of this week’s FOMC meeting was the Dot Plot and how the Fed has removed a tightening bias. Learn all about The World's Most Famous Scatter Plot - The Fed Dot Plot
Looking for a fundamental perspective on the US Dollar? Check out the Weekly USD Fundamental Forecast.
Technical Forecast for US Dollar: Neutral
The technical forecast sits at neutral as we are in the middle of the 2019 price range with falling volatility. While the Fed seems to want a weak USD to support and extend the expansion as long as possible, the global backdrop seems to favor eventual US Dollar strength, though that may be months or quarters away, if it comes at all.
Hey, Fed! Is That All You Got?
Chart Source: ProRealTime charting, IG UK Price Feed. Created by Tyler Yell, CMT
Since August 2018, the US Dollar has mainly oscillated sideways. To the Fed, that may not be good enough. However, a break definitively above 97.20, the March 7 and year-to-date high on a weekly closing basis could cause a lot of cross-asset pain and tighten the financial conditions that the Federal Reserve sought to soften at their March 20, 2019, FOMC meeting.
The chart above (to me) makes a possible argument worth watching. From March 2015 (top on the left) to February 2018, the US Dollar was in a broad correction. That correction may have ended, and a new uptrend may have begun in 2018 in earnest. However, since August (labeled ‘iii’ of 3) to the recent peak in March, there has been a lot of oscillation with a fall in volatility that has taken FX volatility to the lowest levels by some measures since 2014.
Much like 2014, the end of the quiet could be a bang that results in US Dollar strength. Unfortunately, or fortunately, depending on your positioning, the bang of US Dollar strength (if it comes at all) could be months or quarters away. Low volatility could persist, and that could allow Financial Conditions to stay easier than they would be with US Dollar strength.
However, if or when the US Dollar strength comes, it may bring about an impulsive rally of strength equal or greater than the 2018 rally that would likely put a vise-grip on financial conditions. Significant US Dollar strengthening has negative ramifications on US Dollar denominated debt (of which, there’s a ton) and assets that are denominated in US Dollars (there’s a ton there too) like commodities. Given these arguments, and more, one can begin to uncover why the Federal Reserve went ‘Full Dove’ on a relative scale despite the SPX 500 being 3% from all-time highs because the world likely needs them too.
Macro Traders Wait in High Anticipation for the US Dollar
Source: Twitter, @RaoulGMI
As mentioned above, FX Volatility is in a bear market or as I put it to Julian Brigden in the DailyFX Podcast, Trading Global Markets Decoded, a volatility valley of death with seemingly little way out. Based on the chart above, that could continue as the DXY oscillates between 97.20 and the key zone of technical support of 93.79-92.90, late 2018 support.
Price oscillating within this ~350-point range on the DXY seems to be the best the Fed can hope for now as their dovishness does not consist in a vacuum. German 10-year bund yields touched below zero again on Friday, March 22 while the Australian 10-year bonds hit an all-time low with AU 2-years close behind.
The Twitter screen grab above perfectly describes how traders wait to watch what happens to the US Dollar. The ramifications are immense. A weakening US Dollar is helpful across the board for many reasons (too many to list here!), but a strengthening US Dollar, which the charts and technical analysis will make clear through momentum and breakouts who has the ability and strength of balance sheet to withstand the next potential US Dollar rally, despite the Fed’s actions.
The Fed Doesn’t Act in a Vacuum (Though They Likely Wish They Did!)
The Fed gave a dovish surprise on Wednesday, which saw the US Dollar sell-off across the board. The following two days, we saw strength. This is likely not the start of a major move as we’re currently in the middle of the 2019 price range all the while volatility is near historic lows.
What traders do need to keep an eye on is likely the EUR, which accounts for 57.6% of DXY alongside other FX heavyweights like GBP, which continues through the mire of Brexit, and the Japanese Yen, which has also seen volatility collapse from the January 2 opening flash crash.
Should weakness reignite in these currencies, and the DXY trade above 97.20 and close there on a weekly basis, we could see the next bout of global economy hurting economic strength. We saw this in 2000 and 2008 despite the dovish shift from the Federal Reserve all because there was demand for US assets at higher relative yields and the Fed doesn’t act in a vacuum though they likely wish they did.
We’ll see & keep an eye on the chart.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.
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