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Could Fed Meeting be a Sell Signal for US Dollar?

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EDITOR NOTE: Most precious metals investors aren’t approaching their market decisions from a technical analysis (TA) perspective, let alone a short-term one. So, the following article may seem a bit strange, especially considering how the author is using an “hourly” chart when our forecasts span months to years. But nevertheless, if you do have some TA-savvy, it’s best you zoom out far and wide from the hourly to the monthly view. The dollar index has been sinking since March 2020 from a price level it approached once before in 2017. It’s stuck between 94.00 and 88.00. If you compare the dollar index chart to gold and silver, you’ll see that this week’s FOMC Fed meeting rate decision is less a dollar trade than it is sound money trade with silver making the largest jump of all three. That’s the short-term reaction. The longer-term implications will be much more significant, and the good news is that there’s still time to ride the trend in both physical (non-CUSIP) gold and silver. In other words, there’s still time to protect, preserve, and grow your “capital” as the insidious effects of inflation begin rapidly eroding American purchasing power and wealth.

The USD index gained foothold around the 92.50 mark, halting the two-day sell-off ahead of the Fed event. Overall, FX and equities stay range-bound suggesting market prefer to take wait-and-see stance before the major Fed updates. However, it's quite possible that the Fed will prefer to take a timeout on major policy news till the Jackson Hole conference in August, keeping an eye on the spread of the delta strain, which has recently begun to add uncertainty in economic forecasts. Nevertheless, in my opinion, the balance of risks for the dollar is shifted towards weakening, since strong buy-the-dip forces we saw last week and possible extension of the Fed's soft stance may support the hunt for yield for the rest of the summer.

In the first half of the week, investors were assessing the possibility that the selling shock wave that began in the Chinese stock market will spreads to other markets. The Shanghai Composite blue-chip index lost more than 7% in four trading sessions:

Fed Meeting

The avalanche of sales began with fears that the CCP would tighten regulation the fast-growing sectors of technology, private education and real estate. The investment ratings of many large companies have plummeted, the capitalisation losses of some firms have reached 45%. Given the restrictions on capital mobility in mainland China, the “fire” in the market remained local and had little impact on European and American markets.

As for today's Fed meeting, it is very likely that it could be a boring event. Powell recently said that the factors of increased inflation are not sustainable, therefore it is not justified to rush to change something in the policy or prepare investors for changes. This rhetoric followed the June inflation report (which significantly beat the forecast) and if the inflation report was powerless to change Powell's views, then the rest can be ignored. Recently, some well-known centrists in the ranks of the Fed, such as James Bullard and Rafael Bostic, have taken a very hawkish position and today's meeting will show whether they gained any supporters or not.

An interesting technical situation is emerging on the dollar index. Since the end of June, the price has formed a rising wedge, which is often a reversal formation. In addition, the price could not hold out after the breakthrough of the medium-term resistance line, in which the index has been located since the middle of last year, which may indicate its falsity:

Fed Meeting

 

Original post from Tick Mill

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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