For its current cycle, the FXCM dollar basket, USDOLLAR, charted a low back in February 2021. Since then, it has been rampant in its appreciation, but according to its RSI, it's now registered as overbought on the monthly time scale (green rectangle).
Given the timescale, monthly excess readings are not particularly helpful for trading purposes. However, they will still generally comply with the Pareto principle. I.e., most of its time (approximately 80%), RSI will be in the moderate territory between the 20-80 levels. Therefore, the implication is that this excess will be relatively short-lived.
This suggestion seems contrary, given the Federal Reserve's aggressive contractionary policy. The market anticipates a 75 bps hike this month and 50bps in September. Moreover, the central bank is also siphoning liquidity out of the economy through its balance sheet run-off. However, The market adjusted the September hike expectation down from 75bps. This lowering of expectations may indicate that the Fed's capability to maintain its aggressiveness is in doubt.
Consider the US 2-Yr note (candlesticks) and Federal Funds Rate (black line). Whilst acknowledging period differences, there is a pattern between the two. The note's RSI first drops below its blue signal line (marked as 1 in the middle RSI), followed by the Fed Fund's RSI crossing below its blue signal line (2 in the lower RSI). These cue the next cutting cycle.
The current situation is complex, given the lockdown and its unlimited quantitative easing, followed by supply shocks from Russia's invasion of Ukraine. First, however, we ponder if the USDOLLAR's monthly overbought condition suggests another 1 and 2 are on the horizon. Then, a rate-cutting cycle to moderate the greenback's excess?
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.