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16 Sep 2013
DXY gaps down to new lows for this move in reaction to Fed news. Is it a ST overreaction or a valid move?
FXstreet.com (Barcelona) - The US Dollar Index (DXY) gapped lower on the breaking news that Larry Summers has formally withdrawn his name from consideration for the Fed Chairmanship. Will this drop hold Monday? If it does, where will a real floor be established?
Is the DXY’s reaction on-point or a horrible overreaction?
The gap lower in the DXY late Sunday is occurring because many felt that Summers, as the front-runner for the Fed Chairmanship, would have been far more hawkish than Ben Bernanke or the other rumored choice, Janet Yellen. However, as bullish for risk assets / bearish for the DXY as this may seem to be, there are two key questions that must be answered before the DXY can be buried.
First, is Yellen really the next choice? The word on the street is that Obama would not be that enthusiastic about the Yellen nomination because he doesn’t want to be seen as settling for his second choice. The other candidate mentioned by Obama recently is Donald Kohn, who was Bernanke’s right-hand man during the financial crisis as well as Chairman Greenspan’s second for many years. While Yellen is a noted dove, Kohn is certainly more of a cautious dove - if not an outright hawk.
The second question is whether this news – even if Yellen is the pick – will alter the Fed’s tapering plans. If tapering begins as expected in the days / weeks / months with Helicopter Ben at the wheel, are we to expect Yellen to pull tapering off the table? Probably not.
DXY’s close Monday could, if a bullish reversal does not happen, change the technicals
The DXY has / had support at 81.36 according to technicians. If that level fails on a closing basis Monday, we will certainly see a test of the August lows at 80.75 and likely see a test of 80.49 projected support. At that latter level, which still fits into technicians’ macro bullish outlook for the DXY, a more substantial rally still has a chance to commence.
Is the DXY’s reaction on-point or a horrible overreaction?
The gap lower in the DXY late Sunday is occurring because many felt that Summers, as the front-runner for the Fed Chairmanship, would have been far more hawkish than Ben Bernanke or the other rumored choice, Janet Yellen. However, as bullish for risk assets / bearish for the DXY as this may seem to be, there are two key questions that must be answered before the DXY can be buried.
First, is Yellen really the next choice? The word on the street is that Obama would not be that enthusiastic about the Yellen nomination because he doesn’t want to be seen as settling for his second choice. The other candidate mentioned by Obama recently is Donald Kohn, who was Bernanke’s right-hand man during the financial crisis as well as Chairman Greenspan’s second for many years. While Yellen is a noted dove, Kohn is certainly more of a cautious dove - if not an outright hawk.
The second question is whether this news – even if Yellen is the pick – will alter the Fed’s tapering plans. If tapering begins as expected in the days / weeks / months with Helicopter Ben at the wheel, are we to expect Yellen to pull tapering off the table? Probably not.
DXY’s close Monday could, if a bullish reversal does not happen, change the technicals
The DXY has / had support at 81.36 according to technicians. If that level fails on a closing basis Monday, we will certainly see a test of the August lows at 80.75 and likely see a test of 80.49 projected support. At that latter level, which still fits into technicians’ macro bullish outlook for the DXY, a more substantial rally still has a chance to commence.