The US Dollar has been trading in a tight range against its major rivals for the past two weeks, and the Dollar Index is gently forming a bottom after an impressive oversold condition. However, traders are advised to be patient. Last August, the dollar was similarly oversold, which coincided with weakness in US equities. However, it took more than a month for the Dollar Index to rally strongly. In other words, a low Relative Strength Index is not in itself a buy signal. One should not succumb to FOMO and look for a low to buy. It makes much more sense to join the uptrend when it is already in place.
Earlier this week, the Fed sent a mixed signal to the markets. On the one hand, it lowered its GDP growth forecasts for the current year but also raised inflation expectations. The former brings us closer to a rate cut, while the latter makes us wary of a spike in inflation as we saw three years ago.
Powell is hardly a hawk. He is quite reactive to the stimulus to cut rates but has more than once delayed action when it is necessary to raise rates. This time, too, he will likely be tolerant of some increase in inflation if he sees weakness in the labour market or consumer demand.
The major US indices have been rallying since the end of last week and gained even further ground this week following the FOMC’s post-interest rate decision comments.
As we warned last week, oversold conditions in equity indices attracted buyers, and the S&P500 added over 3% to last week’s lows. Meanwhile, the index remains below its 200-day moving average, suggesting that the bears continue to dominate.
CNN’s Fear and Greed Index is still in Extreme Fear despite a steady recovery since early last week. A rebound to levels above 25 here could be followed by more active buying in equities. For now, that moment is just around the corner, and it is worth being patient and cautious so as not to fall into the bear trap of increased selling after a small rebound.
The main factor weighing on equity markets is the growing fear of an economic contraction or recession as a shock from the tariff wars. However, the markets have seen it all before in the first term of the Trump presidency. Then, as now, there was a lot of media noise and international chatter, but the global economy did not go into a downward spiral, and the risk of a repeat of the tariff wars of a century ago remained just a scary story.
The FxPro Analyst Team