Dollar suffers post Powell complications

Summary

Things could get more complicated for the dollar and risk appetite from here.

Hangover

The U.S. stock market pullback is partly linked to attention returning to possibly over-egged hopes on the weekend’s trade talks. In fact, although firm on Thursday, European stock markets also traded below highs struck following comments by Fed chair Jerome Powell. On the other hand, the extent of Wednesday’s bullish eruption was such that a hangover from the overreaction was highly probable either way. Earlier, a dollar bid resumed for a spell to partially correct DXY’s second-largest drop of the month. Fundamentals capped that bounce eventually: disappointing weekly claims and Personal Consumption Expenditure readings.

Not so fast

As such, dollar conditions could still be considered to be more in flux than definitively downgraded. After all, one Powell clarification doesn’t make a downturn. (He now sees rates as near ‘neutral’ compared to far off neutral weeks ago). But the other complication is relative. A softer dollar could still be stronger against many currencies given faltering rates across developed markets. We note that Fed fund traders swiftly slashed expectations to just 41 bps of tightening at one point on Thursday—not including December’s done deal. That essentially equates to just one hike next year. We doubt the Fed will retreat that fast from prior guidance of at least two hikes in 2019.

Eyes on Trump-XI

Whilst risk appetite could still get a further look-in between now and all-important discussions between Trump and Xi on Saturday night, our expectations are low, and the trade conflict won’t be resolved over one weekend. But after Powell, the risk-reward outlook for the short-to-medium term favours almost any trader of a major pair who is not a dollar bull. Even a strongly conditional yet conciliatory signal from U.S. President Donald Trump could kick another prop out from under the greenback, given its current state. And if U.S. market rates weaken more, less ambiguous conditions for risk seeking could be one result.

Thoughts on Dollar Index’s technical chart

Powell has dealt the dollar index such a severe blow that attempting to reference its rising trend since mid-September with a shallower line than before is already problematic. In itself, that is a sign that the trend is less reliable. We also note that DXY has now failed above its 96.98 August peak on a third clear occasion. The top carries a strong psychological charge. Before mid-August, the index had not reached such an elevation for more than a year. The resistance continued to cap DXY at last check. We therefore see a breach of the index’s lower trend as just a matter of time, particularly whilst fine oscillators (like the Slow Stochastics gauge in Figure 1) point to an underlying decline in the strength of buying. The next clear support looks to be 96.158. That level is likely to impel persistent selling from now on, unless DXY can establish itself above its closest strong resistance near 97.