The markets have fallen for it yet again.
“Fool me once… fool me twice…”
At this point, we’re losing count over how many times the Fed has fooled us all.
Almost exactly one month ago, the Fed reiterated its view that it would cut interest rates three times sometime this year.
But now, things are looking very different.
Greater Confidence
In Fed Chairman Powell’s own words, “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”
Powell, of course, is talking about when the Fed might be ready to deliver on its long-awaited rate cuts.
And while every market is impacted by the Fed’s monetary policy, one of the most important of those markets is the U.S. dollar.
The dollar has been on a tear since March 8. The dollar index (DXY) has risen as much as 3.50% since then.
So will the dollar continue to strengthen, or is it getting ready for a dramatic reversal?
There are a few clues we can look to in order to try and answer this question.
I’ve prepared an updated price chart of DXY below. Check it out so you can see the key technical parameters that will help traders with the future direction of the dollar.
As we can see, DXY has reached the upper boundary of a parallel trend channel.
This means the dollar is at a critical juncture and one of two things is about to happen.
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Two Paths for the Dollar
The first possibility is that the upper boundary line of this channel will serve as strong technical resistance, ultimately sending the dollar much lower.
In this case, we shouldn’t expect DXY to rise above 107, the previous swing high from October 2023.
The second possibility is that DXY will break strongly through the top of this parallel channel.
If this were to occur, then we should look for further dollar strength. This would mean a breakout beyond the October high of 107.
Right now, the dollar is trading according to the market’s expectations for what the Fed may or may not do when it comes to interest rates.
We should keep a close eye on the technical parameters we just went over.
If the market respects this parallel channel, then it’s likely that dollar weakness will coincide with inflationary reports coming in cooler than expected.
On the other hand, if the current trend of hot inflation reports continues, we should look for further dollar strength and an eventual break above that 107 high.
Happy trading,
Imre Gams