FXCM’s USDOLLAR basket catching up to real rate decline


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FXCM's USDOLLAR basket has a high correlation with the US 10-year real rate. The current correlation coefficient is at 85%, suggesting a positive relationship between the two.

The real rate declined by 4.51% last week and is currently trading around 1.82%. Last week's decline was technically important as it completed a potential short-term bar reversal in the real rate. Whilst is does not guarantee a lower yield, it does increase the probability of a lower yield ahead.

The USDOLLAR reaction was delayed until this week, but it does seem as if it is now also completing a similar potential short-term bar reversal. We will not truly know until the end of the week, but if it closes below the green horizontal line at 1, the short-term signal will be completed. Again, it does not guarantee a lower greenback, but if completed the probabilities of a lower dollar ahead do increase.

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A catalyst for yesterday's dollar move was Federal Reserve Chair Powell's testimony to the House Financial Services Committee in Washington. The markets reacted positively with the Fed Chair saying, "We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."

Whilst "progress toward [its] 2 percent inflation objective is not assured", the short-term bar reversals do suggest that the market views the odds in favour of rate cuts. The market pexpects the first cut to be in June, with the CME FedWatch Tool showing a 68% probability of a rate cut at the Federal Reserve's June meeting.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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