Past Performance: Past Performance is not an indicator of future results.
After a 2020 which saw the greenback's value decline significantly (off the back of the Federal Reserve's unlimited quantitative easing), 2021 has seen the currency stabilise and begin to appreciate. The USDOLLAR has now shifted up a gear. Technically speaking there are a number of positives to the weekly chart above.
- The USDOLLAR has moved above its black 30-week exponential moving average. This typically happens after an accumulation stage completes and a mark-up stage begins.
- There is a higher trough (HT) followed by a higher peak (HP). This is the technical definition of an uptrend.
- The stochastic (blue oscillator) has moved to 80, suggesting a sustained momentum push may be underlying current movement. If the stochastic holds this level this probability increases.
- The RSI (red oscillator) is above 50 and on the bullish side of the indicator (blue rectangle).
- Importantly, the peaks and troughs are now defined by the orange trendline as opposed to the shallower green trendline. I.e., the trend's gradient has shifted up because the greenback's momentum has accelerated.
FOMC Communication Turns Hawkish
Markets tend to be forward looking and an explanation of the technical acceleration most likely lies with the anticipation of the winding down of the Federal Reserve's asset purchases programme. In the last FOMC press conference held on 22 September, Fed Chair Powell indicated that the central bank may start tapering its asset purchases program from as soon as the next FOMC meeting in November, and will likely look to conclude by mid-2022. Moreover, there has been a shift in the dot plots and the FOMC is now split 9-9 as to whether rates will move next year. Consider:
We further note that 3 members are expecting a 50bps move in 2022 (yellow highlight). Given the forward-looking nature of financial markets the movement in yields and the greenback is not surprising as it starts to discount this hawkish change from the previous dot plots.
Tapering of the asset purchases is happening. It's is no longer a question of "if" but "when". The actual timetable has not been communicated; however, it is likely that this will be become known at the November FOMC release and press conference. If there is any deviation from current expectation, the USDOLLAR's momentum may alter. I.e., if the tapering is less aggressive then currently anticipated, the market will need to adjust for that and a slowing may be experienced. However, as long as the trend shows a series of higher troughs followed by higher peaks the USDOLLAR is considered to be in uptrend.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…