On FOMC day +1 we find Treasury yields down (bonds up) and the US dollar index down as inflation fears – and thus, Fed fears – ease. The main support for USD has been the hawkish Fed. In the absence of a hawkish Fed the main support is a would-be market liquidation. However, index futures are generally positive.
USD’s bull flag is getting thumped and the question “bull trap?” is still a valid one. The pattern continues to favor ‘bullish consolidation’ as long as it holds the SMA 50, but the looks of RSI and MACD indicate a southern exposure.
If USD were to lose the March high and break down, a reasonable target on a corresponding seasonal market rally would be USD support at 103.50 and the SMA 200. Meanwhile, the base breakout is still intact. So, as has been the case with the markets for some time now, patience is suggested as this decision point plays out.
The Gold/Silver ratio (GSR) is still perched in support of USD and a would be liquidity crisis. But that would likely be indicated by an impulsive spike in the GSR. All that is happening currently is a constructive state above the moving averages (and the Grimacing Face’s minor caution zone). It is important to realize that the GSR can also indicate a disinflationary (as opposed to deflationary liquidity crisis) environment when it is firm but not impulsive, which is where Goldilocks generally lives.
Bottom Line
USD is still at a decision point. GSR is still elevated but not ringing an alarm.
If USD were to break upward and eliminate the ‘bull trap’ scenario while GSR impulses higher, we’d have an ‘everybody out of the pool’ situation. Collect cash income and await buying opportunities, IMO in quality gold stocks first and foremost.
If they consolidate or flat line, or even rise gently, a disinflationary (favoring Tech, growth, etc.) flavored seasonal rally can continue to play out.
If they drop notably, even within a still constructive bigger picture, a seasonal rally favoring the inflation stuff can play out (we’d then have caution on that on a decline to USD’s SMA 200 at 103.50).
