Chart Of The Day: Fedspeak Could Bottom U.S. Dollar

Richard Clarida, Vice Chairman of the Federal Reserve, said his central bank is set to start raising interest rates in 2023, while scaling back its massive asset purchasing—its method to keep the economy lubricated—as early as this year. The comments sent Treasuries into a spin, their price dropped suddenly, producing a rising gap to yields for the first time in two weeks.

10-year Treasuries Daily

The upside gap was the longest we can identify on the current chart, just as the 50 DMA bears down on the 200 DMA which is setting up a technical catalyst. If the short MA slumps below the 200 DMA, it triggers a Death Cross, an aptly named event describing a price weakening which is also a bearish signal. Alternatively, if the 50 DMA finds support above the 200 and rebounds, it would signal a positive price reversal which is a bullish indicator.

Will this be the trigger for a reversal, after yields have been falling at ever faster rates?

Clarida sounded positive about the economy, even while acknowledging the risk from the Delta strain of COVID-19.

According to the ADP report, private sector employment growth is weakening, as employment levels are returning to capacity. Investors are now waiting for tomorrow's influential nonfarm payrolls, released on the first Friday of every month.

In Fed rhetoric, St Louis President James Bullard said that inflation will be “more persistent” than anticipated, even as he reiterated that it will be transient. And Dallas President Robert Kaplan argued for the gradual paring of bond purchasing, if the jobs market continues to full employment, confirming the comments of Clarida.

Let’s see how expectations for tightening have been affecting the different time frames for supply and demand for the greenback.

Dollar Index Daily

The dollar has been going sideways since the end of July 2020, before it hit its lowest level since April 2018 in September 2020, pushing gold to an all-time high in August. Investors allowed the US currency to range as they waited for clarity amid rising inflation, offset by continuous Fed promises that inflation is temporary and that stimulus will remain in the foreseeable future.

If, this more urgent rhetoric in favor of continued accommodation continues, the dollar could rise above 94.00, completing a double-bottom, signaling a rally to at least 97.00.

Yesterday’s Fedspeak pushed the dollar to provide a topside breakout of a bearish pennant, blowing out its downside implication, forcing traders to reverse positions, a likely catalyst to take the greenback toward the neckline of the double-bottom, after having been rejected late last month. The dollar pulled back today, but as of now is finding support above the failed bearish pattern, supporting the view that traders reversed positions.

To that effect, the 50 DMA crossed over the 200 DMA, triggering a Golden Cross—demonstrating relative pricing improvement, a bullish signal—as well as moving above the 100 DMA which establishes a bullish formation where each shorter MA is rising above a longer one. All this supports the short-term uptrend since the late-May bottom.

Trading Strategies

Conservative traders should wait for the price to complete the double-bottom before risking a long position.

Moderate traders may want to wait for a pullback, finding support by the pennant.

Aggressive traders may enter a long position at will, provided they have a plan that justifies the entry.

Here are the basic parameters for such a plan:

Trade Sample

• Entry: 92.10
• Stop:Loss: 91.80
• Risk: 30 pips
• Target: 93:30
• Reward: 120 pips
• Risk:Reward Ratio: 1:4