Fed has cemented the dollar’s fall

The Fed did not give any clear signals about the start of the stimulus rollback at the end of its regular meeting, indicating only the existence of discussion about it. That’s not to say that stock markets breathed a sigh of relief, as key indices only managed to recover some of the losses incurred earlier in the week. Chinese stock indices bounced back from multi-month lows, but their gains today are limited and unsustainable.

The yield curve has flattened somewhat in the debt market, indicating expectations of a more measured monetary policy normalisation. Technically, this is a breeding ground for rising equity indices and a weaker dollar, although equities are experiencing some hesitation so far, bumping close to the top.

There is more certainty in the currency market, where the dollar is under some pressure. The intraday charts clearly show a weakening reversal, with the dollar index jumping from 92.5 to 92.77 in the first minutes but then coming under sustained pressure, dropping to 92.1 by the start of European trading on Thursday.

The daily charts also show a bullish advance from the upper end of last months’ trading range. While technically, the dollar’s rise stalled as early as last week, it was worth waiting for the market’s reaction to the Fed meeting to be more confident of the trend.

The US central bank comments and approach favour the USD sellers, forming the basis for a pullback to the lower boundary of the trading range around 89.60.

Interestingly, an important technical signal - the golden cross - did not work at all, and we saw a systematic weakening of the DXY instead of the anticipated rise.

The world’s most popular currency pair, EURUSD, has another boost on the decline to the 1.16-1.17 area. The development of this movement opens the way to the highs of this year, at 1.22-1.23.

The rising trend has also established itself in GBPUSD. Earlier this month, the pair got support on a decline below 1.36, where the 200-day moving average was. Sterling is well-positioned to return to the highs above 1.42 in a matter of weeks and continue to climb higher levels while plenty of competitors are lagging. Increased traction in the Pound is provided by both the booming house prices and the rising stock markets, which directly impact speculative interest in the British currency.

The next signals from the Fed are not expected before the Jackson Hole symposium at the end of August. Until then, the weakening of the dollar could be very pronounced.