Another month and another round of Fed “will-they-won’t-they” rhetoric.
But whilst the verbal see-saw continues to swing from the positive to the negative, the interesting question to ask is – “What has changed?”
Before opening a trade, a professional investor will have a Plan. A roadmap of what decisions will be made at what levels. However, within this roadmap will be critical levels, those levels which will make the investor question the original trading idea. Levels which show the roadmap – The Plan – has changed.
The question for The Fed now is – has the USD Plan changed?
Since the end of 2015, the USD has been under significant pressure, with the USD DXY Index steadily falling from 100.50~ to test the 92.62 critical low of August 2015 and 92.25, (38.2%) retracement of the 2014-2015 rally. The subsequent bounce has reached 95.00, with rising momentum studies and a gradual improvement in short-term investor sentiment suggesting potential for further gains in the coming weeks.
It is this gradual improvement in investor sentiment which will be of interest to The Fed. Whilst the USD is trending sharply lower, the impact of a rate rise would be significantly reduced. In fact, as we mentioned in a previous post on 31 March,
we broached the idea that Miss Yellen could be waiting to see how the USD Index performed around the critical August 2015 lows. If prices bounced, and investors began to turn more USD bullish, that could be a good entry level for a rate rise.
Now that this scenario is unfolding, will we be hearing a slightly more positive tone, as central bankers ‘test the waters’ with gradually more bullish press releases? There may not be an immediate rate rise, but the initial approach might be to hint at the possibility of it. This in itself could be enough to push the USD even higher, and stabilise price action. When prices subsequently settle back, then the rate rise could be seen, which would propel prices sharply higher with increased volume and momentum.
(A 3rdwave rally for Elliot Wave analysts.)
From a cross asset perspective, there is increased interest in cash positions from equity investors, as the weakening MSCI World Index highlights difficulty maintaining current elevated levels. The rotation out of US equities will likely see a move into Gold and Oil, but with Oil already overstretched and correcting lower, there is the likelihood that Hedge Funds, portfolio and asset managers will move into cash, and wait for better entry levels in commodities.
This could also help to push up the USD Index and do some of the work for The Fed.
For now, we anticipate a more hawkish tone to come out of Fed meetings, and whilst we don’t anticipate a rate rise in May, an argument is forming which would suggest an increased probability in the coming months.
Has The Fed USD Plan changed?
