Will the FOMC Announcement Mark the Turn?

As the Fed embarks on its two day meeting, likely resulting in no action, increases in the reported PPI have started to make some ripples as inflation rises in a weak economy (stagflation).  Meanwhile, debt problems in Greece and the rest of European Club Med have really shaken the euro, likely ensuring that the ECB, at a minimum, keeps rates steady in the future.

Today, the dollar moderately exceeded our upward target before turning over again.  The constituent currencies, however, still have some possible downside.

How to make sense of all of this?  We suspect the Fed will tip the balance tomorrow with its decision and, perhaps more importantly, the wording of its statement.  They need to be dovish while sounding hawkish.  If they are successful, then the dollar may rally a bit longer--perhaps to the 150 day moving average.  If the market sees through the statement to reality, then we may see the beginning of a massive sell-off in the dollar.  If, by some amazing twist of fate they actually make a token raising of rates (token, because anything less than double digit rate hikes is unlikely to curb any inflation in the future), then we may see a monster rally in the dollar.  Each of these scenarios has a significant impact on us.

If the dollar weakens (ie, the market sees through the jawboning), it will be time to make any gold purchases yet unmade, along with gold miners.  If the market buys the hype, sit back and let the euro and yen completely bottom on support levels--it may take a week or two.  If the Fed actually does something, dump assets and wait for the big correction to play out.

We suspect that the Fed will do nothing, and that the dollar rally is over within a few days after reality sinks in.  Let's see how it goes.

Meanwhile, a quick update on the key currencies in the USDX.  The red lines mark the key support levels where we anticipate that the currency will find support and turn.  They seem to be moving very tightly, so when one turns, they'll likely all turn--meaning when the dollar decline begins again, it will do so very quickly.

As a side note, pay attention to the relative strength of gold today.  The dollar is up strongly, and gold is only marginally down.  It is likely we've seen the bottom already, barring a Fed move that dramatically takes the dollar up. Best case is probably a retest of the intraday lows before the current counter trend turns.  We're watching for a weak day in the gold price that should be weaker given dollar strength, coupled with an up day for the HUI.  That will likely mark the bottom.

In priority order, most important to the USDX first: