Will the DXY reversal lower continue

After last week’s FOMC meeting, the market was left disappointed. The Fed, despite delivering its first rate cut in 11 years and ending quantitative tightening (QT) had failed to confirm the dovish path of future guidance the market had priced.

In our article, “FOMC - another point of view” https://www.cityindex.com.au/market-analysis/fomc-another-point-of-view/ we argued, “With an eye on the better data in recent weeks the Fed has saved policy bullets for when they might truly be needed.”

Frustrated by an abrupt end to trade talks in Shanghai last week, President Trump announced last Friday he would impose a 10% tariff on a further U.S. $300bn in Chinese imports, effective September 1 with scope for the rate to be increased "well beyond" 25%.

U.S investment bank Morgan Stanley wrote in a research note to clients yesterday if the “US lifts tariffs on all imports from China to 25% for 4-6 months and China takes countermeasures, we believe we will enter recession in 3 quarters.”

An ominous warning as the game of global one-upmanship continued this morning. The U.S. Treasury Department unhappy with the recent fall in the Chinese currency designated China, a currency manipulator. The accompanying press release stated that “Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”

The escalation in the trade war in recent days, strongly suggests some of those saved FOMC rate cut policy bullets are likely to be spent very soon. A September rate cut is a certainty, and a third rate cut in October is now probable.

What does this mean for the U.S. dollar?

In the article above, we warned of a possible reversal lower in the U.S. dollar index the DXY, following the FOMC meeting.

Subsequent price action confirmed this suspicion and our view remains that the DXY index should continue lower towards the support provided by the 200-day moving average at 97.00/90. A break and close below 97.00/90 would then allow the down move to continue towards trend channel support at 96.00. In the interim, sellers should cap rallies backwards the 97.80 resistance zone, and this is where I will be looking to resell the DXY.

Source Tradingview. The figures stated are as of the 6th of August 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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