God Save the King (Dollar)
Jul 19, 2023
The rebound in U.S. Treasuries in recent weeks may have been a boon for U.S. equities and precious metals, but in the process, one victim has been claimed: the U.S. dollar. King Dollar no more, the DXY Index is on pace for its worst month since November 2022, when it fell by an astounding 5.11%.
Part of the problem for the U.S. dollar has been the retrenchment of Federal Reserve rate hike odds through the end of this year; a 25 basis point rate hike has been lobbed off the /ZQ and /SR3 futures curves. But it’s not just perception around the Fed that has hobbled the greenback; it’s also been shifts in expectations for other major central banks.
After the Federal Open Market Committee (FOMC) meeting on June 14, rates markets were discounting two more 25-bps rate hikes in 2023 by the Fed, two more from the European Central Bank (ECB) and three more from the Bank of England (BOE), according to overnight index swaps. Now, even after the ECB delivered a 25-bps rate hike on June 21 and the BOE upped the ante with a 50-bps rate hike, the ECB is expected to hike twice more, while the BOE is forecast to hike at every meeting the rest of the year. Widening interest rate differentials, which has provided a tailwind for the U.S. dollar, have been a veritable headwind.
Barring a sudden revival of Fed rate hike odds, or a collapse in BOE or ECB hike odds—the beginnings of which may have started today, in the wake of the June Eurozone inflation report and the June U.K. inflation report—any near-term rally by the U.S. dollar should be treated with suspicion.
The decline in /6B in recent days has not breached any meaningful technical levels, and with the uptrend from the October 2022 and March 2023 swing lows intact, it’s too soon to say that a top is being carved out. Nevertheless, the pullback is significant enough that a deeper setback is possible in the near-term. The first indication that the recent uptrend is breaking would be two consecutive closes below the daily 21-EMA (one month moving average), an occurrence unseen since June 5 and 6. For greater confidence in looking at a top, /6B would need to trade below 1.2600 before the middle of August.
The largest component of the DXY Index is offering perhaps the clearest technical picture. The rally by /6E in July carried it to new yearly highs, but the progress in recent days was halted by a retest of the underside of the rising trendline from the September 2022 and March 2023 swing lows. Former support is acting as resistance, and confidence that a near-term pivot point has been reached would increase should /6E close below its daily 5-EMA (one week moving average), something that has not happened since July 6. Even so, a deeper setback below the daily 21-EMA and the July low (1.0872) is necessary to believe that any pullback is more than a short-term correction.
The technical picture is increasingly muddled for /6J. Over the past year, the area around 0.0071-0.0073 has been a dynamic zone of support and resistance, and the breach of the downtrend from the March and May swing highs failed to carry /6J through 0.0073 on a sustainable basis. Back into no man’s land we go, as it were. Bullish momentum has already started to wane, with slow stochastics exiting overbought territory. Choppy, directionless trading conditions may emerge—unless the reversal by U.S. Treasuries gathers pace anew.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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