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The DXY has fallen but the dip is a buy in our view and we expect it to move back to the upside.

Inflation Still Remains Elevated

Yesterday the personal consumption expenditures price index PCE one of the Fed’s preferred measures of inflation rose above forecast. Excluding food and energy  the Index rose 0.6% for the month after being flat in July. This was higher than the 0.5% economists forecast. On a year-over-year basis, core PCE increased 4.9%, more than the 4.7% estimate and up from 4.7% the previous month.

Despite this the Fed still sees the Fed slowing up rate hikes and the USD has had a major sell-off to the downside. Fed Vice Chair Lael Brainard in terms of rate rises cautioned against pulling back “prematurely,” saying rates will remain higher “for some time” until inflation is brought under control.

Political Pressure to Lower Rates

There is political pressure in the US from various Democrat party members to slow the pace of hikes but this is unlikely to pressure the Fed. Keep in mind Powell continued to raise rates under the previous Republican administration despite Trump publicly stating on numerous occasions he wanted cuts.

Fed V Other Central Banks in Terms of Rate Hike Expectations

The market sees a Fed dovish pivot and rate expectations have fallen this week this view is in stark contrast to how the market sees other central banks in terms of raising rates which we can see on the charts below all central banks are fighting inflation.

fedratecutexpectations

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The US economy is strong compared to the other nations on the chart above so why will they ease up when other central banks won’t? We think the market is underpricing Fed hikes and overpricing potential rate hikes from other central banks.

Stock Markets to Fall and Support the USD

We have also seen a stock market rally but this rally is corrective and there will be no trend change in our view stock market weakness will come into support the USD.

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In terms of the 10 Year Note watch it closely for a turn up from current levels while yields have fallen back the move looks corrective and a turn up would support the USD.

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USD other Bullish Fundamentals 

The USD is also supported by the fact it tends to firm in a global economic slow up and we have one now that we think could turn into a recession - the USD always does well in economic downturns as there are fewer dollars going into circulation and exchanged for other currencies 70% of all loans granted in the global economy are in USD's as economic activity slows less USD's sold for other currencies. The "USD smile" points to more strength and another chart below shows how important the USD is in terms of financing global growth

 usdsmile

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DXY Technical Analysis

 

We have bounced from major support levels and we are trading up on the day and now expect a move back up to chart highs then longer we expect a move up to 120.00

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