Is the Fed managing a USD reversal?

Time to make little marks to update this slide posted on 13 June 2016 to the log-in section. To recall, currencies with the exception of GBP and JPY are really dominated by Fed communication this year which applied to currencies, is really to manage the DXY between 92 and 100.


DXY development since 2014


Recall what I wrote on 19 April

If there is any shred of credibility in the ‘4-rate-hikes-this-year-becomes-2’ Federal Reserve, that shred has gotten smaller because you see, the markets continue to sell off the USD.

FX majors overlay from 15 Dec FOMC

FX majors overlay from 15 Dec FOMC

Except for GBP, all forex majors in this chart are now stronger than USD since December FOMC. That turning point or peak USD appears to be late January and the point where majors crossed into positive territory was late-February.

This is starkly different outcome from end-December when the USD rallied (ex JPY) when the market believed that there would be further rate hikes this year.

From another angle, this was a chart I posted back in March ‘About that interest rate hike and 3 DXY levels you must watch‘ explaining how to read rate hike expectations via the Dollar Index.

DXY 2014- present

Chart posted in March

An update shows that this FOMC week, the Dollar Index continues moving towards ‘peak disappointment’.

Two DXY levels you must watch

Two DXY levels you must watch


What does ‘peak rate hike diasppointment’ mean?

I need to clarify this term. Peak rate hike disappointment does not mean no more rate hikes. As long as Yellen and co retains bragging rights, the market remains in two states:

  • Believe in more hikes but at slow pace (move towards DXY 100)
  • Doesn’t really believe but cannot discount totally (moves towards 92.6 technical support)

There are other states too:

  • Really convinced and shown prove of further hikes (DXY beyond 100; never happened post-Dec which is a huge telltale)
  • Totally does not believe or receive confirmation of no more hikes i.e. rate cut instead (DXY falls below 92)

At this moment, the narrative on main stream media wants us to believe that a rate hike will come in June. Real or not, my personal belief is they are doing the ‘boiling frog’ sequence by moving goal posts in small incremental but not alarming level. No savvy analyst will come out to call the lie because this would be end of career move. But it is likely the Fed will keep postponing.

That day we see Yellen mouth ‘more hikes’ but DXY moves below 92 would be the day her credibility bank goes bankrupt.


2 becomes 1. At this point __________?

So the mainstream media is going to sell December? Why not July? Or September or some date in 2017. In fact just fill in the ___________ with any date. D0esn’t matter. If USD continues to weaken as the rate hike gets pushed back, watch 92.6 like a hawk. Because when that day comes

That day we see Yellen mouth ‘more hikes’ but DXY moves below 92 would be the day her credibility bank goes bankrupt.


Lastly this death cross

There are levels and then there is momentum. Once momentum gets a grip especially with the price reaction to the moving averages (resisted), 92 support is going to come and go pretty soon. Previously observed here.

Death cross

Death cross between 13 and 26 week ema; see price reaction to the averages?


Back story in these postings:

  1. Does forex market believe in rate hike story anymore? – 29 April 2016 (log-in required).
  2. My take on currency price action year to date – 27 May 2016.
  3. 3 slides that suggest there just might be a rate hike this week – 13 June 2016.
  4. Should UK choose ‘Bremain’, 0.7350 for EURGBP? – 15 June 2016.


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