Forex Update: Has the tide changed for the USD?

October 14, 2021
by Joseph Jeffriess, Market Analyst

Interesting situation on the USD at the moment. Yesterday, we saw CPI just beat expectations and the core CPI meet the mark that was expected. This semi supported that word from the Fed that inflation could persist. You would think this would maintain support the USD, but after the FOMC we saw a sharp shift away from the USD.

The FOMC minutes pointed to the possibility of tapering in November or by the end of the year. The minutes indicated the tapering could see a monthly reduction of $10 billion in Treasuries and $5 billion in mortgage-backed securities. So, is this a case of buy the rumour sell the fact?

“It seems to be a classic case of buy the rumour, sell the fact type mentality,” said Neil Jones, head of FX sales at Mizuho. “The Fed confirmed the expectations of many investors, I would suggest, holding long dollar positions.”

“It’s just been a situation of liquidating dollar longs – profit-taking of long dollar positions because (Fed tightening) is now somewhat factored into the price.” CNBC

Or did the USD finally reach a point of short-term overvalue? We can see that the USD index added over 5% in 4 months since June. Previously, we have see buyer interest once tapering had been hinted at. Now reality has hit prices have started to decline.

price wise a few signs jumped out coinciding with this weeks retreat. We can see price has struggled multiple times once it has moved into the supply area. We can also see firm resistance at 94.60 that has held again once buyers failed this week. price pattern-wise we can see an ending diagonal that has started to confirm. These patterns are normally seen as bearish once broken in uptrends.

USD USD price is currently trading well out of the diagional and sellers have also beaten the fast uptrend. The shift in momentum and all o the above look to be suggesting that price is now in a short term move lower. We want to see how buyers and sellers react at 93.80 and 93.56 support. If price clears those areas we will be looking to see if buyers can regain control at the longer-term trend line. A hold there could suggest that the overall trend remains in play and we could see the USD continue on its merry way. A break of that trend and we will need to see new signs that the uptrend remains in play and we’re not seeing a change in market direction.

USD DXY D1 Chart

All times are AEDT.