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Technical breakdown extends bearish pressure on dollar

  • While the Fed currently still stands as the only major central bank in steady tightening mode, speculation that this may change in the not-too-distant future has weighed heavily on the dollar. This speculation is reflected in the technicals for several different currency pairs, which are showing clear dollar breakdowns.
  • Pressure on the dollar within the past week was initially sparked by the Fed’s outlook for interest rates last Wednesday, which was more dovish than expected. This stance was further reinforced on Monday when Fed speakers appeared to echo that dovishness.
  • Aside from the Fed’s stance, other major central banks have provided hints that their divergence with the Fed’s tightening path may soon begin to narrow.
  • On Tuesday morning, the UK’s consumer price index for February was released. This data, a critical inflation marker for the Bank of England, showed a higher-than-expected rise in consumer prices at 2.3%. While the Bank of England kept interest rates unchanged last week, one dissenting member voted for a rate hike. If inflation maintains on an upward trajectory, the central bank may be compelled to begin raising rates sooner rather than later. In this event, the pound should get a further boost and the policy divergence between the US and UK should begin to narrow.
  • Similarly, the European Central Bank has recently brought up the possibility of raising interest rates before ending its bond purchase program. Speculation over this possibility has helped lead to a sharp boost for the euro against the dollar.
  • With a continued gradual outlook for Fed tightening, coupled with other major central banks potentially looking to close the gap with the Fed, the US dollar has been punished rather severely in a short period of time.
  • The USD/CHF chart shows the dollar’s breakdown clearly. After having broken down below a key uptrend channel last week after the FOMC meeting, USD/CHF extended its fall below parity (1.0000). After doing so, the currency pair formed a bearish flag pattern below parity. On Tuesday, as the dollar resumed its plunge, USD/CHF broke down below the inverted flag pattern and went on to fall further below the key 200-day moving average. With any further dollar pressure below the 200-day moving average, major support resides at the key 0.9850 level.

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