USDOLLAR breaks down from consolidation pattern following softer CPI print

Weekly Symmetrical Triangle

Earlier in the week we tracked the USDOLLAR's symmetrical triangle pattern (converging green trendlines), noting that the lower boundary was being tested. FXCM's USDOLLAR basket has now broken down out of the pattern, close to the apex of the triangle. In conjunction the weekly RSI has dipped below 50 (blue square), which is on the bearish side of the oscillator. The longer the RSI maintains this position, the greater the likelihood of further downside pressure on the greenback.

Primary Trend Turns Down

Following the breakdown from the symmetrical triangle, FXCM's USDOLLAR basket has charted a lower peak (LP), followed by a lower trough (LT). This is a defined downtrend and given that it appears on the USDOLLAR weekly timeframe, we regard the dollar's primary trend to be down.

The weekly stochastic is also angling down and if it reaches its lower quintile (blue arrow) and holds, there will be an underlying downwards momentum. This may result in a series of lower peaks followed by lower troughs, but this remains to be seen.

The Breakdown Coincides With Lower Inflation

US Inflation surprised to the downside yesterday. Headline CPI came in at 3%, lower than the previous months 4%, and core CPI was also lower at 4.8% (5.3% - previous). The monthly figures for both headline and core CPI were 0.2% each, which is a remarkable 2.43% annualised. The Fed tightening cycle is having an effect, especially given the moderation in core CPI.

Given the lag of monetary policy through the transmission mechanism, we still expect a 25-bps hike on 26 July, but this may be the last increase in the current cycle. The decline in the USDOLLAR gives credence to the scenario which includes an end to the Fed's hiking relative to other regions. I.e., the Bank of England and European Central Bank are relatively more hawkish than the the Federal reserve and that is being reflected in the greenback's relative decline.

Daily Technical Analysis

The daily chart shows FXCM's USDOLLAR basket trading in its bearish zone, between the lower blue and red bands. Moreover, the red Bollinger bands have pulled away from each other (black ellipses), suggesting an expansion in the the greenback's volatility. The daily RSI is below 50, which is the bearish side of the oscillator. The longer the bearish channel and the sub-50 RSI position are maintained, the greater the likelihood of a decline in the USDOLLAR.

However, we do note that the RSI has dipped below 20. This is regarded as oversold and is unlikely to hold for long. So, a short-term bounce will not be unreasonable as the oversold condition normalises.