It’s been a long, lonely slog since we first forecast the very contrarian view that plunging inflation would prevent the FOMC from raising rates in June.  The last time I checked, Goldman had the probability of a hike at 95%.

But, as we discussed in The Big Picture, May 3 the drop in oil prices was likely to push CPI below 2%. We reiterated this view the following week [see: Bye-Bye Rate Hikes.]

Guess what the BLS just reported?

The Fed might or might not hike rates anyway.  They still have five hours to mull things over.  But, the currency targets we laid out over these past couple of months look very likely to be tagged today. And, every single one is screaming “no rate hike!”

We listed the major ones yesterday:

I continue to think the real opportunity tomorrow lies with currencies and oil.  Here’s a quick summary:

– DX, currently at 97.05, going to 96.07-96.14
– EURUSD, currently at 1.1199, going to 1.1470
– USDJPY, currently at 110.05, going to 108.82

Whether or not we get the full follow through will depend on how things go starting at 2pm.  But, we’re off to a very nice start.

continued for members…

The charts for the above, before and after the CPI announcement.

USDJPY before……and, after:EURUSD before…

…and, after:DXY before……and, after:CL, which should rally to offset the damage from the USD slide, broke out yesterday but fell back after the awful API data.  Note that it has broken out again, but has an EIA inventory report coming out at 10:30.  This is a longer-term play, with the 51 target not due until the end of the month or even early July.

Note that EURUSD and USDJPY have a long ways to go to their most profitable targets.  This represents the lingering uncertainty as to whether or not rates will be increased.  If they’re not, we might not get much more of a move.  If DX drops through 96.10 or so, though, look for equities to react strongly.

And, that is the reason there’s still hope for a rate hike.  If the dollar breaks down, things get ugly real fast.

And, let me reiterate that each of these targets represents real support — either Fib, channel, or both.  The simple point of letting currency pairs move as expected is to provide a floor for stocks when the pairs reverse.

The reason equities haven’t fallen apart this morning should be obvious.  Even though the reflation trade might finally be dead, the lack of inflation means more accommodative monetary policy.  More free money!

And, of course, VIX has dropped to a slowly rising trend line several times in a row — whenever stocks have dipped, of course.I still expect SPX to drop to at least its SMA10, currently at 2431.48.  Note the SMA5 200 and white channel bottom intersect there with it around 11:25am.If it goes off the rails, there is additional support around 2422, 2413, 2408, 2398, 2388 and 2363.  But, I suspect we’ll get 47 oil and VIX back below 10 before any of those lower targets come into play.UPDATE:  11:31 AM

The EIA report wasn’t so bad on the oil front, but gasoline inventories shot up quite a bit. As a result, CL is back below the trend line and is testing the long-term purple channel bottom and the gray .886.  It should hold here, as a drop through 44.16 or so would complete a huge H&S Pattern.SPX is still pointing at 2431.48 (but, remember, there’s a gap to fill at 2429.73) at around 11:55 – 12:00.The rest of the gang… UPDATE:  2:06 PM

The Fed raised rates, but in a very dovish manner.  I’ll come back to that in a moment.  In the meantime, here’s the market’s reaction.  DXY and EURUSD are little changed, but USDJPY plunged to our target (108.80 versus 108.82) and bounced right back.VIX is the biggest factor and is, so far, holding equities close to even on the day.

SPX got a VIX-inspired bounce, but is giving back its gains here.UPDATE:  2:48 PM

Here’s the SMA10.  I’d cover here, but be prepared to re-short if it moves back below.

UPDATE:  3:11 PM

Back to short with tight stops for yellow channel top at 2424.90 or gray Fibs at 2426.42, 2421.70 or 2418.90.  If the yellow channel top doesn’t hold, then the SMA20 at 2413, the purple .886 at 2408.45 or the white .618 at 2388.43 and SMA100 at 2363.99.

Note that NDX has further to go.UPDATE:  3:20 PM

Stopped out on the short, as VIX just tagged its yellow channel bottom and reversed, leaving SPX back above the SMA10.  Pretty straightforward – above SMA10 one should be long and below, one should be short. UPDATE: 3:56 PM

I’d revert to short here, as VIX has backtested the red TL and white channel and ES just backtested its SMA5 200.  As always, I’d only hold short overnight if you can hedge or deal with the gap risk. I have to run out for an appointment, will post more later this afternoon.

UPDATE:  4:00 PM

Just a quick recap before I sign off for the night.  My daughter is taking me to a Boston concert for an early Father’s Day present  Fun!

The currencies all reached what could be close enough to good targets.  A reversal here would be justifiable.  But, as everyone knows, it’s hard to judge a market by FOMC days.  Today, for instance, the VIX reversal at the yellow channel bottom made all the difference in the world.

Is the dollar really done moving?  We’ll find out tomorrow.  But, for now, nothing bounced back so far that it seems done.  No trends were broken in the other direction.  EURUSD held a little TL from late May.DX bounced back, but didn’t even clear the SMA10.VIX backtested the little white channel and the backtest held.

USDJPY nailed some nice Fibs and the yellow channel line, but there’s a clear line of sight to the lower targets in the falling white channel.ES is off about 6 points, and is testing the IH&S target at 2428 yet again.And, NDX, which had a worse day than SPX, has another 2.0 – 2.5%  to go before reaching real support.

Bottom line, there’s a decent chance of more downside yesterday.  We’ll see how things go tonight.

GLTA.