Since the pandemic high of 2020, the USDOLLAR has followed a structured cycle. There are four distinct phases.
1. Distribution phase.
2. Mark-down phase.
3. Accumulation phase.
4. Mark-up phase.
Past Performance: Past Performance is not an indicator of future results.
This phase was uncharacteristically quick. As the pandemic unfolded, margin calls and the demand for dollars by debt-laden emerging economies drove the USD price up. However, on 23rd March 2020, the Fed announced its unprecedented unlimited QE program. This effectively capped the USD rise and prepared the market for the next phase of the cycle.
The Fed's QE program resulted in the US M3 money supply increasing dramatically and the Fed's balance sheet swelling to over $8.6tn. With these huge surpluses, the value of the greenback eroded. As such, the mark-down phase had no choice but to chart. From April 2020 to the low of February 2021, the FXCM USDOLLAR basket declined by 8.7%. This phase was characterised by a series of lower peaks followed by lower troughs. At the same time, US yields were dramatically reduced, with the US10Y dropping to a low of 0.33% in March and maintaining a lower band until November of that year.
The fact that the nadir in yields had been reached and that US treasuries had bottomed by November 2020 contributed to the accumulation of dollars. At this stage, various economic series had stabilised and were showing signs of improvement. Discussions and debate around inflation had begun and markets were starting to anticipate better data ahead. As such, the dollar was a value candidate and showed signs of support.
The USDOLLAR bottomed in February 2021. For the next five weeks, it appreciated until peaking towards the end of March 2021. The dollar was then sold down over the next six weeks before charting a higher trough in May 2021. The May bottom was higher than the February bottom and was the first real sign of accumulation. Then the FOMC statement of 16 June was the catalyst for a repricing of the greenback. This meeting indicated that 13 FOMC members saw interest rates increasing in 2023, with 7 of 18 seeing rate increases in 2022. The Fed also increased its inflation forecasts.
This drove the greenback sharply up and a higher peak was charted towards the end of June 2021. Since then, the greenback has charted a series of higher troughs followed by higher peaks. This is an uptrend and the USD is being marked-up by the market.
The USDOLLAR has now appreciated strongly over the last four weeks and may run into short-term exhaustion. President Biden reaffirmed Jerome Powell as the Fed Chair for another term. This has given the market a sense of continuity. The Fed will still taper and rate hikes in 2022 remain probable. If there are signs of a correction, we will be looking for the next higher trough to chart until proven otherwise.
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.