The dollar strength is a central market theme. The reason is that it is a critical driver of financial markets. It has charted a series of higher troughs followed by higher peaks and is at 20-year highs on a trade-weighted basis.
The weekly RSI is heading towards an overbought area, which has coincided with swing highs previously. However, current market fundamentals will provide a support for any greenback corrections.
The real rate has been appreciating since its low in Nov 2021. However, the Fed March statement (red dashed vertical) was the first confirmation of quantitiative tightening (QT). Six weeks later, the real rate turned positive.
Whilst there have been instances where the real rate registered as overbought (blue rectangles), notably at the swing highs of the USDOLLAR, an argument for moderation will be challenging.
The Fed's balance sheet is declining and is below its 3-months moving average (third chart from top). I.e. liquidity is being syphoned out of the economy.
The bottom indicator is the correlation coefficient between the real rate and the Fed balance sheet. Again, it's a negative correlation from the red vertical dashed line.
QT continues over the medium term. Moreover, given the correlation coefficient, it is likely to persist in acting on real rates, acting as support for the rampant dollar
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.