Trend Trouble For The U.S. Dollar As Rate Hike Timing Pushes Out Further

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Includes: FORX, FXB, FXE, UDN, UDNT, USDU, UUP, UUPT
by: Duru

Summary

The U.S. dollar's uptrend is showing its first signs of real weakness since the run-up began last summer.

A later timetable for a rate hike from the Federal Reserve is at least a part driver of the recent weakness.

The euro and the British pound have directly benefited from the dollar's weakness as a marginal increase in optimism descends upon Europe's prospects.

I now await the Fed this week to give me a fresh reason to maintain my bullish bias on the U.S. dollar.

When I wrote almost three weeks ago about profiting from the uncertainty in the timing of the first rate hike by the Federal Reserve, Fed Funds Futures first climbed past 50/50 odds for a rate hike in October, 2015. Since then, the timeline has been pushed out to December where the market is pricing in odds of 56.2% of at least one rate hike. These odds were 61% almost three weeks ago. The odds for October have dropped to 42.1%. The droop in these odds has had a predictable impact on the U.S. dollar (NYSEARCA:UUP) as it has trended downward for most of the time since my last post.

The U.S. dollar has dipped below its trendline at the 50-day moving average for the first time since the run-up began in July, 2014.

The chart above shows that the U.S. dollar made a lower high on April 13th. This is the first step toward ending a trend. The next and confirming step would be a break of the previous low made on April 6th. On that day, the U.S. dollar index made its first real test of its uptrend. It will be VERY easy now for the U.S. dollar to slide and slide fast if that support fails - all the Federal Reserve has to do in this week's meeting is show even more hesitancy and uncertainty than it did in the last meeting about hiking rates.

The flip side of the U.S. dollar index is the euro (NYSEARCA:FXE). The euro is just over 50% of the index and as such is its most important driver. On Friday, April 24th, the euro traded ABOVE its downtrending 50-day moving average for the first time since December 16th. At the time of writing, the euro is clinging to this milestone for a longer duration than it did in December.

What Grexit? The euro has finally shown some resiliency since avoiiding a breach of March's multi-year low

The level to watch on EUR/USD remains 1.11. The euro has now failed multiple times to break through that resistance. Speculators are still betting as heavily as ever that the euro still has further to go to the downside.

Speculators are as bearish as ever on the euro

Source: Oanda's CFTC Commitment of Traders for the euro

The British pound (NYSE:FXB) is a much smaller part of the U.S. dollar index, but it has been one of the strong performers (against all major currencies) during the U.S. dollar's spell of weakness. In this way, it has served as a great hedge against my bullishness on the U.S. dollar. I unloaded the entire hedge into last Friday's burst of strength. I am now bearish the British pound for the first time in a VERY long time. I am avoiding GBP/USD until the Fed shows its cards, but I suspect election worries will resurface enough to at least cap the pound's advance from here. The United Kingdom will hold elections on May 7th.

The British pound is above its downtrending 50-day moving average after a sharp run-up from near 5-year lows against the U.S. dollar

Source for charts: FreeStockCharts.com

Relatively strong economic data of late has helped the British pound. A relatively bullish tone in the minutes from the Bank of England (BOE), released on Wednesday, April 22nd, seemed to seal the deal for a strong finish to the week. Like the Reserve Bank of Australia, the BoE has found some reason for more hope in the eurozone:

The BoE said that for some policymakers, the improved euro zone outlook was the month's biggest development. For others this was canceled out by unexpected weakness in the United States - though there was a good chance that would be fleeting.

Policymakers also appeared slightly more focused on upside risks to British inflation than in previous months, despite the risk that some downward pressures on prices could persist.

Strong economic growth was unlikely to be able to continue without pushing up prices and wages, which needed to grow faster to help the BoE hit its 2 percent inflation target.

In my last post on the Fed and the dollar, I guessed that the U.S. dollar would hold its uptrend yet also find an upside cap given the Fed's articulation of deflationary concerns from a strong dollar. I am still bullish on the U.S. dollar from current levels, but I am looking for the Fed this week to give me a VERY good reason to maintain this bias. The trend is in trouble…

Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am long the U.S. dollar and short the British pound