What Happened to the Dollar

The FOMC statement didn't offer much on Wednesday but it was enough to send  the US dollar over the technical cliff. Several major levels broke as the dollar plunged in the aftermath. We look at what's ahead. The USDX charts below are an update from our May 19th analog USDX chart.

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The US dollar moves in the aftermath of the FOMC statement look like the kind of thing you would see after a major dovish disappointment but they were more about positioning and technicals than anything from the Fed.

Tweaks to the statement included saying inflation was 'below' target rather than 'somewhat below'; and that the balance sheet runoff will start 'relatively soon' which could mean later than September. With regards to the inflation tweek, it remains to be seen whether the change was simply a mark-to-market reflection or a possible sign of the Fed's plan.  

What's more important is what it didn't say. There were none of the hawkish or optimistic notes that many market participants were hoping for, and evidently positioning for. In a binary sense, this decision was either going to be neutral or more hawkish and traders piled into dollar longs in the hopes of a bounce.

It didn't come and the dollar fell by more than a cent. The move got a second wind on technicals as key levels broke. EUR/USD took out its August 2015 high of 1.1714, opening up a foray into the 2014/2015 the 1.20-1.27 zone.

The 1.2461 low in USD/CAD gave way and the pair touched a two-year low. AUD/USD also hit a fresh cycle high and cable is just a few pips away from doing the same.

The CFTC positioning data has repeatedly shown a bias to dollar longs but we're finally seeing cracks in the resolve.

Looking ahead, data comes back into focus. On Thursday, the volatile US durable goods orders are due, followed by Friday's first look at US Q2 GDP. The Fed may have been given an early look at GDP and that could explain the tepid statement. Beyond that the major numbers will be inflation, but July CPI isn't due until Aug 11, so there's plenty of time (scope) for the dollar to continue lower and the 200-week MA on USDX wilbe be the talk of the town.