FXCM's USDOLLAR basket has been trading in its neutral area between the two blue bands for the last six sessions. The daily stochastic has leveled off and is indicating a neutral momentum (blue arrow).
There is an air of uncertainty, with participants unsure of what comes next for markets. A large part of this is that markets are hesitant of how Fed monetary policy plays out and are looking at Q1 GDP and core PCE for direction (released Thursday and Friday at 12:30 GMT).
Core PCE is forecast at 0.3% m/m. Unless there is a upside surprise, a 25-bps hike on 3 May is expected – possibly the last in this hiking cycle. This has largely been discounted into the USDOLLAR.
Bollinger theory suggests that volatility tends to move in cycles. An expansion in volatility leads to a period of calm and a tightening of instability leads to an increase in volatility. The weekly chart shows that the USDOLLAR's Bollinger bands are tightening (green rectangle) i.e., the current calmness is likely to lead to either a breakout or breakdown.
The weekly RSI is on the bearish side of 50. This suggests that the underlying momentum is to the downside. If it maintains its current position, a breakdown is favoured i.e., further dollar weakness. This scenario connotes a weaker GDP print and further relief in inflation. If these do not materialise, the RSI is likely to flip to the bullish side of 50
US GDP and Core PCE
The chart on the left shows US GDP y/y and the right side is US core PCE. Below both charts is a rate of change indicator (ROC) over 12 months. The ROC shows that both US GDP and US PCE are decelerating (blue rectangles). If this is sustained, the Fed is unlikely to tighten much further and we will be very near the apex of the current hiking cycle.
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.