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Reflections #42 - Houston, the USD has a problem

Since the GFC, the USD index enjoyed an upward trend which culminated in a local top around 114.80 in September 2022. Since then we have seen a correction which brought it back right into the middle of the 15 year upward trend (chart 1).

Is this only a correction or is the top of the 15yr USD bull cycle already behind us?

2 observations support the latter:

  1. EURUSD which makes up the lion share in the USD index, has just taken out a key resistance level signaling at least that the bearish picture is about to become neutral. After breaking to the downside in April 2022 and reaching levels around 0.9540, the long-term technical picture clearly signaled news lows on the horizon (chart 2). A backtest of the breakout area - former support (blue upward trendline) turns to resistance - is a common pattern and usually confirms the bearish picture. EURUSD did exactly this however failed to generate enough downside momentum afterwards. Following some consolidation and a battle between USD bulls and bears, we have broken to the topside of the upward trendline which at a minimum negates the EURUSD bearish picture.

  2. Relative monetary/fiscal policy is a dominant force supporting the USD. The outsized US fiscal and monetary stimulus after the pandemic has given the USD an additional significant boost which propelled it much higher than the normal cycle suggested. This enabled the inflation genie to get out of the bottle and forced the Fed to its sharpest rate hike cycle - post Volcker. With inflation now on the retreat and the purchasing power/excess savings now depleted (see picture) all the exceptionally supporting factors for the USD are slowly evaporating.

Bottom line: The USD is struggling as we approach the end of the Fed rate hike cycle. This 15 yr USD cycle has already lasted much longer than the average (7yr), boosted by post pandemic measures. Market technicals suggest, we are behind the peak of the last 15 year USD bull run.

It is not over until it is over but the stars are aligning for it.

Stay tuned for more updates.


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