It was a rather pedestrian FOMC Statement day on Wednesday. There is GDP data incoming, and the widely Fed-followed Core PCE Price Index data comes out on Friday. What can we take away from the FOMC Statement and press conference?

Rates unchanged. No rush to raise interest rates. Inflation should persist.

No surprises here.

However, there was some notable price action in the US Dollar Index during Wednesday’s session. The US Dollar Index initially rose on the FOMC statement at 2:00 PM. During the press conference, the USD fell as Fed Chair Jerome Powell mentioned that inflation should persist for several months. It is noteworthy price action and can be a forward-looking indicator for the direction of other asset prices.

First, let’s take a look at the daily chart of the $DXY:

Figure 1 - US Dollar Index November 1, 2020 - July 28, 2021, Daily Candles Source stockcharts.com

As we know, the US Dollar has been in a longer-term downtrend. The repeating pattern has been lower daily highs. Short the dollar was a heavily crowded trade recently that we examined and discussed. After reaching oversold conditions, a quick bounce occurred. However, with no rush to raise interest rates and Fed open market operations continuing, the $DXY could try the downside once again. This downward move could impact the prices of commodities even further to the upside. There is a key Fibonacci level that was not quite reached in the index on its last downside attempt (near $88.41).

Figure 2 - US Dollar Index July 28, 2021 - July 28, 2021, 1-minute Candles Source stooq.com

I find value in this type of analysis; when you can take a daily/longer-term trend/outlook and then take an intraday peek on a day such as a Fed day. I would have guessed that the market would be factoring in further inflation already. However, based on the $DXY behavior intraday, it appears that the US Dollar may want to get set to go and retest the recent low near $89.50.

GDP Data, Core PCE

On Thursday morning, we are getting GDP (q/q), and on Friday morning we will get the Core PCE data. GDP can be a market mover, and the Fed does like to monitor the PCE data for inflation signals.

As the US Dollar may weaken some, a place to park some cash could be in the UDN - Invesco DB US Index Bearish ETF. I wouldn’t expect any home runs here; the ETF is unleveraged, but a 2 - 3% pop could be in the cards here if the $DXY wants to test its recent lows.

Figure 3 - Invesco DB US Dollar Index Bearish Fund - September 4, 2020 - July 28, 2021, Daily Candles Source stockcharts.com

UDN is doing its job rather well and is inversely tracking the US Dollar Index at an efficient rate. Other traders could use the $DXY product on ICE if their accounts are enabled for it. ICE passes through the monthly market data fee for its products to retail traders (somewhere in the neighborhood of $110 per month) to get quotes/trade their products.

So, using UDN can give traders some pure exposure to a dollar decline. We will be eyeballing the $21.48 - $21.64 levels as potential TP targets for now. Levels and sentiment can change quickly, so stay tuned!

To sum up the current viewpoint and opinion:

I have BUY opinions for:

• Invesco DB US Dollar Index Bearish Fund (UDN) between $21.00 - $21.16. GDP data will be out before the NY cash open, so if this gaps higher, let’s review and check our risk reward. Initial target $21.48 - $21.64. Suggested risk to a daily close below$20.83.

I have SELL opinions for:

NONE

I have a HOLD opinion for:

• First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID). Update 07/28 post-market: Tacked on 1.15% on Wednesday and closed at a fresh all-time high. Daily RSI(14) level at 62.69. As previously mentioned, I will be looking for an exit in the mid to high 90’s. Stay tuned for an alert. Always use a stop order that caters to your individual risk tolerance.
• Invesco MSCI Sustainable Future ETF (ERTH). Update 07/28 post-market: Added 2.53% on Wednesday. Looking great. Hold. Always use a stop order that caters to your individual risk tolerance.
• Invesco Solar ETF (TAN). Update 07/28 post-market: Added a big 4.16% on Wednesday. Hope you got on board near the 50-day moving average. Hold. Always use a stop order that caters to your individual risk tolerance.
• SHORT iShares Transportation Average ETF (IYT) between $257.00 and $259.99 with a target between the recent low of $249.28 and the 200-day moving average of $240.21 (currently). Always use a stop order that caters to your individual risk tolerance. 07/28 post-market: Has moved our way since entry. As mentioned before, consider having working GTC buy orders to cover shorts at $243.01 for now. Let’s see if we can get some continued weakness.

Thanks for reading today’s Stock Trading Alert. Your readership is valued and appreciated.

Have a great day!

Thank you,

Rafael Zorabedian
Stock Trading Strategist