Dovish Powell, Stimulus Vote to Weigh on USD


US Dollar, Federal Reserve, DXY, Fiscal Stimulus, Jerome Powell – Talking Points:

  • Equity markets slipped lower in APAC trade as policy tightening fears in China weighed on sentiment.
  • Dovish rhetoric from Fed Chair Powell and the prospect of additional fiscal stimulus will likely keep USD on the back foot.
  • Head and Shoulders topping pattern hints at further losses for the DXY.

Asia-Pacific Recap

Equity markets dropped during Asia-Pacific trade as investors continue to focus on Federal Reserve Chair Jerome Powell’s testimony before Congress. Australia’s ASX 200 fell 0.90% on the back of a pullback in iron ore prices, while Japan’s Nikkei 225 plunged 1.61%. Hong Kong’s Hang Seng Index and China’s CSI 300 toppled 2.7% and 2.54% respectively, as fears of policy tightening weighed on market sentiment.

In FX markets, the New Zealand Dollar largely outperformed its major counterparts after the RBNZ kept its monetary policy setting steady, while the haven-associated Japanese Yen, Swiss France and US Dollar slipped lower. Gold and silver prices crept marginally higher as yields on US 10-year Treasuries dipped slightly lower.

Looking ahead, a flurry of speeches from several members of the Federal Reserve headlines the economic docket alongside US new home sales data for January.

US Dollar Price Outlook: Dovish Powell, Stimulus Vote to Weigh on USD

Finance Prop Economic Calendar

Dovish Powell, Stimulus Vote to Cap USD Upside

The US Dollar may struggle to gain ground against its major counterparts in the coming weeks, weighed down by dovish commentary from Federal Reserve Chairman Jerome Powell and the upcoming House vote on President Joe Biden’s $1.9 stimulus bill on Friday.

In the Fed’s semi-annual monetary policy testimony before Congress, Powell reiterated that “the economy is a long way from our employment and inflation goals” and therefore the central bank will maintain loose monetary policy conditions until “substantial further progress has been made” towards achieving its two mandated goals.

The Chairman also seem unperturbed by the recent rise in inflation expectations, stating that “inflation dynamics do change over time but they don’t change on a dime, and so we don’t really see how a burst of fiscal support or spending that doesn’t last for years would actually change those inflation dynamics”.

US Dollar Price Outlook: Dovish Powell, Stimulus Vote to Weigh on USD

He also stated that it will take more than a sustained drop in the unemployment rate to reassure the central bank that the labor market has recovered to pre-pandemic levels, stressing that “when we say maximum employment, we don’t just mean the unemployment rate, we mean the employment rate”.

The current unemployment rate stands at 6.3%, sharply higher than its pre-crisis low of 3.5%, while the percentage of Americans employed has plunged from 61% before the pandemic to 57.5%. With that in mind, it appears that accommodative monetary policy settings are here to stay, which will likely keep the Greenback on the backfoot against its major counterparts.

US Dollar Index (DXY) Daily Chart – Descending Channel Guiding Price Lower

US Dollar Price Outlook: Dovish Powell, Stimulus Vote to Weigh on USD

DXY daily chart created using Tradingview

The technical outlook for the US Dollar Index (DXY) remains skewed to the downside, as price continue to track below all six moving averages and within the confines of a Descending Channel.

The development of the RSI and MACD are indicative of swelling bearish momentum, as both oscillators slide below their respective neutral midpoints.

A daily close below psychological support at 90.00 would probably intensify near-term selling pressure and generate an impulsive downside push to challenge range support at 89.20 – 89.40. Piercing that brings the 2018 low (88.25) into the crosshairs.

Alternatively, a rebound back towards the trend-defining 55-EMA (90.73) could be on the cards if support at 90.00 holds firm.

US Dollar Index (DXY) 4-Hour Chart – Head and Shoulder Top in Play

US Dollar Price Outlook: Dovish Powell, Stimulus Vote to Weigh on USD

DXY 4-hour chart created using Tradingview

Zooming into a 4-hour chart bolsters the bearish outlook depicted on the daily timeframe, as price carves out a bearish Head and Shoulders reversal pattern.

A convincing break below range support at 89.95 – 90.05 is needed to validate the bearish reversal pattern and open the door for the index to retest the yearly low (89.21). The pattern’s implied measure move suggesting that price could fall an additional 1.7% from current levels to 88.40.

However, if range support remains intact a short-term recovery rally towards the sentiment-defining 200-MA (90.54) could eventuate.

— Written by Daniel Moss, Analyst for Finance Prop

Follow me on Twitter @DanielGMoss

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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