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Currency alert - USD strength returns

This week's Federal Open Market Committee meeting produced a statement like many before it. The Fed board is confident in the outlook for the US economy, and the world. Despite expressing worry about persistently low inflation it announced the rundown of its balance sheet, and the withdrawal of extraordinay liquidity will begin next month. This was well flagged back in June.

What's different this time is in the Fed's projections, especially the "dot-plot". This chart shows the US cash rate the sixteen borad members expect at various points in the future. The forecasts for December this year set the market alight. Four members expect no change from  the current level, in line with expectations derived from interest rate market pricing in the lead up to the meeting. However eleven members expect rates will be 0.25% higher, and one predicted 0.50% higher.

This hawkish tone saw the USD strengthen, bonds sell off, and an intitial drop in shares. While stock prices recovered into the session close, they fell again overnight, and this time stayed down. The USD could be the key, as it sat at important levels in many markets in the lead up. It's now pulling back from those levesl, suggesting a reversal of the recent weakness and a possible trend change. The fact that USD strength is returning in so many markets simultaneously makes the signal more powerful. Let's start with the largest market in the world.

EUR/USD rejects 1.2000

!* *!The weekly chart shows 1.2000 is an important level. The pull back to 1.1900 since the FOMC meeting could mean the beginning of a new downtrend as the USD strengthens and the EUR weakens. The postential signal is amplified by the picture in USD/JPY:

This big picture view illustrates the importance of the 108 level. Here again the USD is rising after a period of weakness, rejecting the key level. The signal also echoed through the gold market:The drop back through US $1,300 an ounce is also important given gold's status as a currency proxy. Finally, commodity currencies suffered a double hit. The strengthening USD hurts, but the impact on commodity prices as the USD rose meant commodity currencies fell more than others. Here's the AUD/USD:The pair hovered around 0.8000 for weeks. The pullback as the AUD was hit shaved a cent almost immediately. This is potentially the start of a new slide in AUD/USD.

In my view the co-ordinated rejection of important levels across markets is a clear sign of a sea change. I'm now expecting the USD to continue to gain against currencies and commodities over the coming weeks and months. This fits with a fundamental view that the US ecomony will continue to improve and that interest rates in the US will rise further and faster than traders previously thought.

Whether this action informs other traders' views is a choice for them alone. But in my opinion the USD train is leaving the station - and I'm on board.

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