Dollar Bulls Seek Fed Guidance While Riding Wave of Confusion

  • Elliott waves provide contrasting outlooks for the greenback
  • Minutes of Fed’s last policy meeting seen setting market tone

After a confusing week for dollar bulls, a closer look at some of the technical underpinnings of the greenback paints an even more mystifying outlook for the Trump reflation trade.

Popular analysis such as the Elliott Wave theory, which seeks to predict moves by dividing past trends into five sections, suggests the rally is sustainable in the short-term. Further out, the same measures raise questions.

According to the theory, created by Ralph Elliott in the 1930s, the daily charts show completion of wave 1 at 111.60 yen entering wave 2, a corrective wave which points to potential gains up to 115.96 before resuming wave 3, which will reinforce the dollar’s downtrend from mid-December.

While that may not convince non-believers in technical analysis, it’s no more confusing than the dollar’s reaction last week. The greenback was little changed even after Federal Reserve Chair Janet Yellen’s more hawkish tone bumped up bets on a March interest-rate hike, and a steeper-than-forecast increase in U.S. consumer prices signaled inflation in the world’s largest economy is right where the central bank wants it.

“As confidence in the dollar weakens with more articles and headlines like those in recent days and weeks, a tipping-point is on the horizon at which investors collectively realize they are at significant risk of being on the wrong side of a potentially large move,” Ulf Lindahl, chief executive officer of A.G. Bisset Associates, said in a recent note.

Investors counting on a continuation of the rally in U.S. equities and the dollar since Donald Trump’s presidential election now look toward Wednesday’s release of the minutes from the Fed’s Feb. 1 policy meeting for a further catalyst while they wait for the administration to provide more details of its promised growth agenda.

Even with the optimism that has sent stocks to record highs, the dollar soaring and bond prices lower, expectations for those goals being met are more guarded.

Long-term charts suggest the greenback has a lot of room to fall. Mean reversion on 5-year charts show the dollar could fall toward 103.63 yen, its average closing price during that period after having held standard deviation resistance of 117.41.

Elliott Wave charts on a longer-term basis share the view for a lower dollar. Wave analysis shows a completion of wave 2 with wave 3 emerging. The 3rd wave is typically the most powerful and extended and if it should mirror the last one the greenback would drop toward 100.00.

When all is said and done, the Trump reflation trade lives on, but it just may be on life support.

Feb. 20Presidents’ Day
Feb. 21Fed’s Kashkari in Minnesota
Fed’s Hawker in Philadelphia
Fed’s Williams in Boise 
U.S. to Sell 2-Year Notes
Feb. 22FOMC Meeting Minutes
Fed’s Powell in New York
Existing Home Sales  
U.S. to Sell 2-Year Floaters
U.S. to Sell 5-Year Notes  
Feb. 23Initial Jobless Claims 
U.S. to Sell 7-Year Notes
Feb. 24New Home Sales
U. of Michigan Sentiment

— With assistance by Lananh Nguyen, and Andrea Wong

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