Head and Shoulders Top
FXCM's USDOLLAR basket appears to be charting a head and shoulders top. This pattern is a reversal in trend from uptrend to downtrend. The pattern is yet to complete, and we note the pattern completion gap i.e., the price to neckline gap. However, the weekly RSI is below 50 (green rectangle), which suggests a bearish momentum is present. The longer the indicator maintains below 50, the more pressure will be applied to the greenback.
USDOLLAR and Real Rate
The US 10-year real rate has held a robust correlation with FXCM's USDOLLAR since April 2022 – about the time the Fed announced its quantitative tightening policy. However, since the USDOLLAR's potential right shoulder (rs?), the correlation has declined to 47% (green shaded rectangle). This is because the real rate has matched its January low (red rectangle), whilst the USDOLLAR is lagging and is still holding above its low.
A Hard Landing and Loose Policy
The banking crisis of confidence is likely to lead to tighter credit conditions, which infers that a harder landing is a distinct possibility. If so, a change from tight to loose monetary policy becomes a potential scenario. As it is the real rate that has come down to its January low, the market is taking this scenario seriously. This will create further headwinds for the dollar, potentially leading to the completion of the topping pattern.
Yesterday, the Institute for Supply Management's March manufacturing index (PMI) showed that the US manufacturing sector is contracting at an increasing rate, with the index for new orders falling to 44.3, down from February's 47. This is an indication of weak demand. This slowdown supports the scenario for a reduction of future interest rate hikes. Tomorrow sees the release of the important ISM Services PMI.
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.