Quick Recap
The Fed put a rate cut, possibly as soon as September, back on the table overnight. But the US dollar fell. As the Aussie dollar bounces back toward 75 cents and Euro rallies back toward 1.11 a look at the price action on the US dollar index suggests a period of US dollar weakness could be at hand.
What You Need To Know
The Fed decided to leave rates on hold last night but said in its statement “near-term risks to the economic outlook have diminished”. That's a signal that the rate hikes are back on the table in the US.
The Fed also added that “on balance, payrolls and other labour market indicators point to some increase in labour utilization in recent months” which again suggests the hand brake on Fed rate hikes since last December's first post-GFC hike is being released.
Indeed the Fed said “the Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will strengthen”. Again this suggests that rate rises are certainly back on the table and September is live.
But stocks weren't concerned and the US dollar weakened. That tells me the market recognises this renewed focus on higher rates but is unfazed by it and based on the overnight price action might have expected a more hawkish statement.
What's interesting in this context is technical set-up we now see in the US dollar index and what that might mean for other currencies.
The Charts
The US dollar index has just run into, and failed, at dual overhead resistance as you can see in the chart below.
This convergence of resistance, and the sharpness of the reversals in the past few days of the USD index suggest that downside levels beckon. The key level I'm watching is a break of 96.60. That would suggest a move to 96 and if that breaks 93.85.
This potential move of up to 4% lower for the US dollar will then put upward pressure on Euro, Aussie and even Sterling in the week's ahead. Crucially it would suggest that if the RBA cuts rates next week to try to lower the Aussie it could fail.
The US dollar outlook is also subject to what the Bank of Japan does tomorrow but as we saw with the move in the past 24 hours USDJPY has strong overhead resistance.
This reinforces the outlook in DXY terms.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader