US Dollar dings target #1, inflation trades still on

USD (DXY) makes a 38% Fib retrace

USD (futures, DXY) has been in an uptrend for all of 2021. The uptrend was birthed by the March high and subsequent higher low in May, which turned out to be the right side shoulder we then began to manage. That shoulder was to an Inverted H&S bottoming pattern with three upside objectives.

#1 is being hit at the resistance of the March 2020 low and the September 2020 high along with the 38% Fib retrace area (Fibs not drawn in on this chart). That was the minimum objective.

But USD is early in the process of turning its moving average trends up. Thus far it has only been an ongoing negative divergence to the inflation trades (with the inflation touts having at least temporarily dropped their “death of the dollar” chants while continuing to tout a new “commodity super cycle”). Here at target #1, it could fail back to a bear market. Or, it could continue upward to 96 or beyond. The pattern, with its down-sloping neckline, targets the 98 area. The downward slope could imply another failure in the buck later in 2022.

us dollar, dxy

Watch the Gold/Silver ratio. It took a hit since late September but if it tries to make a comeback along with a still rallying Uncle Buck, you’ll have a good signal that it’s time for much caution on the inflation trades.

Meanwhile, with reference to last week’s article on inflation

So let’s note just one of several other ways of gauging inflation. Today, on let’s call it Inflation Hysterics Friday, the Inflation Expectations ETF is tanking to an important support area. The monthly chart above is all well and good for the big picture view, but this picture tells us that the inflation trades are intact but getting a hell of a good test, conveniently with FOMC meeting next week. I have long viewed the Fed as a cynical and self-conscious entity with respect to the inflation it routinely manufactures. This pullback could help the committee maintain some appearance of credibility.

…the inflation trades did indeed bow before the great and powerful Oz, with expectations then regaining a foothold after he’d flown away in his hot air balloon. So at this point and from this perspective the US dollar remains just a negative divergence.

inflation expectations

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