The Dollar’s Short-Term Trend May Be Flipping Following Powell’s Pragmatism
Matt Weller, CFA, CMT February 11, 2020 8:11 PM
Today’s price action may mark the end of the buck’s recent short-term bullish trend.
Twice per year, the Chair of the Federal Reserve makes the trek down Constitution Avenue to update Congressional leaders on the state of the US economy. This event, called the Humphrey-Hawkins Testimony after the lawmakers who initially created the requirement back in 1978, offers a longer-term perspective on the outlook for the US economy and is closely watched by traders looking for insight on Federal Reserve policy over the next six months.
Unfortunately for those traders, today’s iteration of the testimony offered little in the way of actionable nuggets. Across prepared comments and a Q&A session, Fed Chairman Powell reiterated his cautiously optimistic outlook for the US economy, noted the potentially disruptive impact of coronavirus and climate change, and emphasized the importance of achieving maximum employment, even if it required a temporary overshoot in inflation. Though he suggested that the Fed would gradually transition away from the active use of repo operations (the infamous “not QE”), he noted that the central bank would likely continue such purchases into the second quarter.
With Powell opting not to upset the proverbial apple cart, traders saw little reason to tweak their current positions. At the margin, US stock indices did fade from their record intraday highs to trade closer to breakeven levels as we go to press. Meanwhile, the US dollar index also fell to trade lower on the day, even though traders slightly reduced bets on a near-term interest rate cut from the Federal Reserve. According to the CME’s FedWatch tool, fed funds futures traders now think an interest rate cut is more likely than not starting with the Fed’s July meeting, whereas traders were pricing in such a move in June yesterday.
Source: TradingView, GAIN Capital
Looking at the above hourly chart of the dollar index, today’s price action may mark the end of the buck’s recent short-term bullish trend. The index has dropped meaningfully below its 21-hour EMA for the first time since the start of the month, breaking below its rising channel in the process. This price breakdown, combined with the simultaneous break in the MACD indicator below its “0” level, signals that momentum in shifting in favor of the bears, opening the door for a deeper retracement toward the lower-98.00s or 98.00 even later this week.
If seen, this bearish move in the greenback could correspond to a rally in EUR/USD toward 1.10 and a drop in USD/JPY toward 109.00.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.