Dovish Fed shift could bring further USD weakness

The Federal Open Market Committee (FOMC) delivered on their new dovish shift last week, with a slowdown in the world’s largest economy going a long way to forcing the hand of Jerome Powell and co. The decision to move away from the persistent rate hikes of years gone by has raised questions over whether this is going to be a fleeting pause or something more indicative of a wider reversal from the Federal Reserve (Fed).

Much of this will be dependent upon the data, with continued weakness in growth and purchasing managers index (PMI) data likely to provide the basis for a continued ‘wait-and-see’ approach from the Fed. That data is largely going to be dependent upon the outcome of trade negotiations between US and China. The breakdown in economic data across the top two nations comes as no surprise given the ongoing trade spat over the second half (H2) of 2018. A conclusion to that trade war would start to put things back onto a more stable footing, yet until then we could see further weakness and easy monetary policy.

While the US economic picture has been gradually easing back a little, the Fed’s hawkish stance has shown little signs of slowing up until the end of 2018. With the Fed now looking at holding off on any further rate hikes for the time being, it comes as no surprise to see the greenback suffering in response.

US Dollar Index weekly chart

The weekly chart of the US Dollar Index below highlights the fact that we have been moving lower from trendline resistance since early December, with the dollar seeing just one week of gains within the past seven attempts. Instead, there is a chance we will see the greenback move into a more bearish phase. With the index having broken below the lower boundary of a rising wedge, there is certainly a chance we could see the bears start to take hold, with a break below 9337 in particular providing confirmation to such a bearish outlook.

US Dollar Index daily chart

The daily chart highlights the possibility that we are retracing the upward move from 9337, with the index turning higher following a failed attempt to break below 9450. A break above the 9615 swing high would certainly go some way to negating the bearish story. However, until that happens there is a good chance that we could see the dollar start to weaken once again as we approach that crucial 9337 breakdown level.