BTC/USD, DXY (USD Dollar Index), XAU/USD (Gold): Technical Outlook, Edition #25 (17/06/21)

US Fed Chair Powell's inflation backflip causes mayhem in the markets. Today's special edition of the Technical Outlook features a detailed breakdown of the latest from the FOMC

US Federal Reserve officials have signalled the first rate increases are expected to commence in 2023

Markets were caught off-guard last night because of a hawkish shift in tone during the scheduled FOMC (Federal Open Market Committee) session. 

The FOMC is an extension of the Fed (US Federal Reserve Bank). Their core mandate is to determine how monetary policy should be prepared by regularly assessing current economic growth rates' stability and sustainability. 

Adjustments to the interest rate are then decided upon, potentially causing ripple effects that flow from currency markets into others. 

Did you know?

There is a positive correlation between interest rates and fiat currency demand. 

The desire to hold a currency increases with rate rises, as it earns better yields. 

As a result, other markets suffer because speculators receive improved guaranteed returns by holding liquidity (cash) in their bank account. 

In other words...

Certainly, guaranteed yields become extremely attractive during uncertain times to those looking to safeguard their capital or minimise risk exposures to other assets. 

However, Fed Chairman Jerome Powell's unexpected change in tone caught the markets by surprise, shifting suddenly from dovish to hawkish. 

The FED has been downplaying inflation expectations for months, calling it "transitory" and "manageable" while the U.S economy recovers, thereby reflating back to pre-COVID levels. 

That all got placed on hold yesterday when Chairman Powell revealed that the "central bank has effectively entered the taper talk window". 

Here's a brief explanation of tapering stimulus if you're unfamiliar with the concept:

Tapering refers to the central bank reducing the rate of asset purchases intended to stimulate economic growth. 

Typically, tapering occurs to reverse quantitative easing and is usually the first step towards future interest rate hikes. 

Now that we've covered the latest from the FOMC - let's answer two golden questions.

What does the latest FOMC announcement mean? And how can it be represented on the charts?

If the FED reduces its appetite for asset purchases, financial institutions will become more conservative towards riskier exposures and begin to service their debts before interest rates start climbing.

While rates are low, debt-binging is a great way to encourage economic growth if appropriately managed, more so when the FED is voraciously adding assets to their balance sheet… 

Over-leveraged debt can very easily lead to inflation if the economy expands too quickly and begins overheating

Thus, raising interest rates is the only way to keep inflation in check as consumers spend less and save more due to better returns. 

The $DXY (U.S Dollar Strength Index) can depict USD strength and negatively correlates with most other asset classes, particularly riskier assets such as Bitcoin. 

Let's demonstrate this visually by comparing the $DXY's performance against other assets, Bitcoin and Gold. 

U.S Dollar Strength Index, $DXY - Daily (D1) 

Gold, XAU/USD - Daily (D1) 

Bitcoin, BTC/USD - 4 HR

Evident from the charts above, US Dollar strength causes other assets to become shakier, with the riskiest of them suffering the most. 

Funnily enough, Bitcoin appears to be faring better than Gold now. Wyckoff Accumulation Schematic 1 offer hints to explain this shift in interest that speculators find Bitcoin dips more desirable than Gold. 

Wyckoff overlay on Bitcoin, BTC/USD - 4 HR

As shown in the overlay, Phase E aligns nicely with a re-test of USD 37K.

Q's Conclusion 

If the $DXY continues reversing and edging higher off the back of tapering talks, then trading anything against the USD is asking for trouble for now. 

The latest from the FOMC could be the beginning of a multi-wave USD rally if FED Chairman Powell does not soothe his hawkishness. 

The savvy should also keep in mind that this may be a short squeeze after a massive bear market, fooling traders with a 'rally' that is nothing more than a significant counter-trend bounce.

These blips in price can morph into new trends should the 200 MA and key Fibonacci levels break topside on the $DXY.

Structurally speaking, we are still in a bear market - but interest rates are a catalyst of prominent trends, and the US has now volunteered to lead the way. 

See you again for the next update.

- q

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