Black Pipper

Forex Dreamers

The key to understanding the current situation in the foreign exchange market

Take a look at the 4-hour chart of the futures on dollar index (USDX)… We see very strong consolidation in a narrow range (blue rectangle).

USDXH4-130819

Traders are in a state of uncertainty about the future outlook for the US dollar.

Consolidation occurs at the lower edge of the ascending channel. And the exit from this consolidation will determine the behavior of currencies against the dollar in the near future.

USDXH1-130819

On the hourly chart of the dollar index, it can be seen that the consolidation continues for the sixth day and now the price of the futures is trading in the middle of the range.

And while Donald Trump and his Tweets have been the main recent news maker, today’s inflation data may well push the dollar out of a narrow range.

Inflation in the US has been steadily decreasing to the last value of 1.6%. However, the expert forecast foresees its further growth and return to the 2% target.

US inflation forecast-130819

Today CPI inflation data is planned at 1.7%. If investors do not see a steady rise in inflation, then forecasts of further declines in interest rates will receive an additional trump card. This cannot but affect the prospects of the US dollar in forex and it will come under pressure.

The situation is very interesting yields on benchmark US 10-year bonds (US10Y).

US10Y-Fed Fund

At the moment, their yield is 1.632%. And this is at an effective Fed Funds rate of 2.4% (blue line on the chart). This means that the real yield on bonds (minus the current inflation rate of 1.6%) for their owners at the moment is 0.032%. And the yield is very close to the indicators that were at the Fed rate of 0.5%. This all means that the market realistically estimates further significant cuts in US interest rates.

At the moment, futures on the FRS rate are evaluating a rate cut at the September Fed meeting to a range of 1.75-2.00% with a probability of 75.4%. And a further rate cut in October to 1.50-1.75% with a probability of 61.5%.

If the situation develops according to the scenario of lower inflation in the US (or the absence of its growth), despite the avoidance of risks, the US dollar will be under strong pressure and this will lead to its decline relative to other currencies.

Recommendations: monitor the behavior of the dollar index and the direction of its exit from the rectangle, monitor the data on inflation in the United States. And be sure to monitor the behavior of the yield on US government bonds, although, as statistics show, the market has not very good at predicting the future actions of the Fed.

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