The Dollar Pauses Ahead of Fed Decision; RSI and CCI are Oversold

The FOMC meeting is the major event of the week, which could allow Chairwoman Yellen to hone her message about rate lift-off. The Fed is widely expected to remove the word “patient” from its policy statement given strength in employment. However, Yellen is likely to stress that the policy course remains data dependent and that a June rate hike is not necessarily a sure thing. Though a handful of our survey participants project liftoff in June, several suggest there is significant risk the Fed delays, as the numbers on inflation and wages won’t yet satisfy the other half of the Fed’s dual mandate.

As the calendar heads for the decision by the Fed, the dollar has taken a respite. The long upward trend in the greenback has been substantial. The EUR/USD currency pair has rallied nearly 11% so far in 2015, as the divergent paths of the FOMC and the ECB have highlighted the backdrop. The yield curve differential between the US and EU long ends, continue to push in favor of the greenback, which continues to drive the EUR/USD currency pair lower. If the Fed keeps the term patience in the statement the currency pair will temporally reverse course.

Estimates for both Q4 and Q1 GDP have generally been revised lower amid signs of restrained growth in the U.S. and abroad in most sales and output measures, along with big headline inflation headwinds from falling oil prices and a stronger dollar. Additionally, we suspect policymakers, and particularly the doves, remain sensitive to the potential for bearish taper tantrum reactions to the prospects of rate normalization, which could undermine a gradual process and these factors argue for delaying lift-off until at least Q3.

The EUR/USD currency pair is clearly oversold. The RSI (relative strength index) is printing a reading of 23, which is well below the oversold trigger level of 30 and could foreshadow a correction. The commodity channel index is also printing an oversold reading. The current reading of -131 is below the oversold trigger level of -100.

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