E A Bottoming In The U.S. Dollar

I wrote about the push and pull of catalysts on the U.S. dollar index after a breakout above resistance at its 200-day moving average (DMA). Although the dollar usually sustains breaks above or below its 200DMA, this time the dollar quickly proceeded to sell off. DXY broke down below its 200DMA and then its 50DMA before retesting the lows of 2021. With a consolidation of the price action favoring an upward path of least resistance, I see signs of a bottoming in the U.S. dollar (UUP, UDN).

The U.S. dollar index (DXY) is rebounding from a test of its 2021 lows. Source: TradingView

Supportive Monetary Policy from the ECB

Last week’s commentary from the European Central Bank (ECB) combined with events in the U.S. bond market further convince me that the path of least resistance is shifting upward for the U.S. dollar.

The euro (FXE) consumes a little over 50% of the U.S. dollar index. As a result, recent selling in the euro helped drive the dollar’s bottoming pattern. The latest euro drop came in the wake of the ECB’s latest statement on monetary policy. The ECB sounds like it is more concerned with potential tightening in financial markets than with inflationary pressures. As a result, the ECB is leaning on looser and more accommodative monetary policy. From the introductory statement:

“Inflation has picked up over recent months, largely on account of base effects, transitory factors and an increase in energy prices. It is expected to rise further in the second half of the year, before declining as temporary factors fade out. Our new staff projections point to a gradual increase in underlying inflation pressures throughout the projection horizon, although the pressures remain subdued in the context of still significant economic slack that will only be absorbed gradually over the projection horizon. Headline inflation is expected to remain below our aim over the projection horizon.”

The notion of significant slack in the EU’s economy creates a strong contrast to the bullishness and confidence of the Federal Reserve in the U.S. economy. That divergence alone is sufficient to keep me short EUR/USD. The ECB’s concerns over monetary tightening from financial markets provides more support for my trading bias.

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Dr. Duru 1 month ago Author's comment

The publishing process excluded some important reference links:

ECB monetary policy release: www.ecb.europa.eu/.../...210610~115f4c0246.en.html

My post on the confidence of the Fed in the economy: drduru.com/.../north-american-alliance-of-bullish-central-banks/

CNBC article on inflation running hot: www.cnbc.com/.../...f-hotter-inflation-report.html

My earlier bullish bias on the Canadian dollar: drduru.com/.../canadian-dollar-central-bank-optimism-gives-currency-fresh-boost/

William K. 1 month ago Member's comment

It has long been clear that the interests of the federal reserve banks do not favor the common folks who are not stockholders, nor do they favor any who may or will be harmed by inflation.

"The notion of significant slack in the EU’s economy creates a strong contrast to the bullishness and confidence of the Federal Reserve in the U.S. economy."

It does not make the attitude "OK" either. A lack of income increase for the top 10% of the population would not harm anybody living within their means, either. There is more to that "American Dream" than constantly boosting the wealth of the already wealthy.

Dick Kaplan 1 month ago Member's comment

Good read, thanks.

Dr. Duru 1 month ago Author's comment

And thanks for the kudos.