The Federal Reserve released a statement after its March 15th-16th meeting that indicated a lowered outlook for further rate increases. Fed Chair Janet Yellen also held a press conference after the meeting to clarify the Fed's views. No one could claim that the currency market's reaction to either event was dollar positive. It also seems that going forward, more dollar weakness should be expected.
The U.S. trade-weighted dollar (DXY) plunged 1.06%, while the euro (NYSEARCA:FXE) and Swiss franc (NYSE:FXF) soared 1.10% and 1.08% respectively on the Fed news. This is a huge daily move in the FX market. The remaining major European currency, the British pound (NYSE:FXB) was up 0.86% (also a sizeable amount). On the other side of the world, the Japanese yen (NYSE:FXY) was up 0.43%, so the strongest reaction to Fed policy took place mostly in Europe, with one major exception. The biggest paper currency winner was the Australian dollar (NYSE:FXA), which rose 1.39%. This is not surprising since changes in the Aussie are the most closely correlated to gold of all currencies. Gold (NYSEARCA:GLD) itself rocketed up 2.23% in reaction to the Fed.
An article on Seeking Alpha, "Why The U.S. Dollar May Not Rally Further", published in the wee hours of the morning New York time just hours before the close of the Fed meeting, warned of dollar weakness. It further stated that its rally was likely over because the Fed was too dovish compared to what traders wanted from it. Another article published elsewhere on a major blog at almost the same time reported on the dollar bullishness of a major Wall Street bank. That bank was predicting three hikes in 2016 and four in 2017 and that the U.S. dollar rally was far from over. The Fed threw a giant bucket of cold water on that view later in the day.
While the dollar charts aren't bearish yet, there are some negative signs of an impending downturn. If the dollar is going to go down though, the euro, a major component of the trade-weighted dollar, should be going up. Are there signs of a possible impending rally? There certainly are.
A look at a three-year weekly chart for the euro versus the dollar shows the technical bottom (the point where the technicals were most negative) took place in March-April 2015. Flat lines are drawn under this point for the RSI (Relative Strength Index) and the MACD and above it for the black trend line in the DMI shown at the bottom of the chart. The circle in the RSI shows the extremely low value this indicator had at the technical bottom. This oversold level is similar to what happens in anti-bubbles (bubbles on the downside).
The technicals have gained strength in the last year, with the RSI going over 50 and the MACD about to move above zero (the dividing line between bullish and bearish in both cases). Yet, the value of the euro has changed little. Eventually, it will have to rise to catch up.
The euro has also apparently made a double bottom (there is a red line under it on the price section of the chart). This will only be confirmed when its value goes over 1.15 per U.S. dollar. There is also a moving average pivot forming where all three moving averages (the red, blue and yellow lines on the top part of the chart) come together. This almost always indicates a change in direction of the price. This is corroborated by the black DMI trend line falling and being at a low level, which indicates the down trend has lost its strength.
But, you might say, "How is it possible the euro could rally when the ECB has just lowered its benchmark rate to zero percent and has negative deposit rates?" The argument is the same as it is for why the U.S. dollar rally could be over even though the Fed is raising rates. These intended policy moves, at least in broad terms, have been public information for a long time. This has allowed the value of the dollar and euro to adjust to them many, many months before they took place. The euro had a major sell-off between March 2014 and March 2015, while the dollar had a major rally from July 2014 to March 2015. Both currencies had already made their adjustments to current policy moves long ago.
This explains why the FX markets reacted unexpectedly to the ECB loosening policy at its March meeting a week ago. The euro rallied strongly and the dollar sold off just as strongly, although exactly the opposite was anticipated by market mavens. The reaction is detailed in "The Unexpected Stock And Currency Reaction To ECB's March Announcement".
The strength and weakness of the dollar and euro in relation to each other needs to be watched closely. When the euro is stronger, commodities tend to rally , and this is especially true for gold. Unlike the euro, gold has decidedly turned bullish recently (see: here and here for more about this) and continues to get stronger technically. The yellow metal is providing another indication for market watchers that the next move for the dollar is down and for the euro is up.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.