FXCM's USDOLLAR basket has charted a series of lower peaks (LP) followed by lower troughs (LT) on the weekly. Thus, a downtrend defines this timeframe's price action. In addition, this activity accompanies a lower 10-year real rate, which declined by 37 bps last week (up red arrow).
The current dollar downtrend has pulled back close to the 50% retracement (black dashed horizontal). I.e. almost half of 2022's gains have been erased as per FXCM's USDOLLAR basket. Moreover, money has rotated out of the haven, suggesting a risk-on sentiment.
In this regard, we note that the USDOLLAR's stochastic has dropped below 20 and is 18.88 (blue arrow). The longer it maintains in its lower quintile, the stronger this rotation will likely be. i.e. capital may be searching for better returns in risk assets. In our opinion, the key is for inflation data to continue showing signs of moderating. This temperance will take pressure off the Fed, implying that the current rate hiking cycle may be near its apex.
However, whilst the core PCE came in under expectations, we are cautious. On Friday, wage inflation printed 0.6% MoM, double the monthly forecast of 0.3% MoM. This surprise means that average hourly earnings are up 5.1% YoY compared to last month's 4.9%.
Whilst the real rate suggests the worst is behind us, the ambiguity introduced by the wage data suggests further data confirmation is still needed. The Fed will watch wage data with absolute interest and ensure that a wage spiral does not become entrenched.
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.