An increase in short-term interest rates is traditionally viewed as bullish for the dollar. Yet, take a look at FOMC rate hikes over the past year.  Each was followed by a strong decline in the dollar index (DXY.)  When the FOMC declined to raise rates, on the other hand, DXY usually rallied — at least temporarily.

The FOMC made no secret of their plans to raise the discount rate.  So, naturally, we can surmise that front-running played an important role in the price action.  But, does it explain the continuing slump that, so far, has nailed each of our downside targets without fail?

continued for members…

There’s a disconnect between the reported and the true inflation rate.  We’ve touched on this many times over the past year.  And, I think this is key.  The FOMC is well aware of the actual issues — rent, health care and fuel/gas prices.  Gold investors/speculators are aware, too — as witnessed by its recent surge.

So, despite the fact that CPI and PCE perennially report inflation to be under control, it’s not.  The FOMC gnashes its teeth over the failure for PCE to reach 2%…but, maybe to justify continued dovish monetary policy.

The real objective can be seen in the relationship between DXY and SPX.And, as we discussed last week, the problem lies in the chart below.  With TNX about to break out, we can expect continued weakness in DXY.  Needless to say, this will present difficulties for the yen carry trade crowd and, ultimately, equities.As SPX approaches its next key Fib level, and a backtest of the recently broken white channel, I suspect the dollar’s slide isn’t over — with our targets at 88.423-88.682 the next major support when it breaks below September’s lows.The 2.24 extension has been hanging out there ever since SPX broke through the 1.618 in the wake of the US election — when the full court press involving USDJPY, CL and VIX manufactured (for the first time ever) 12 consecutive months of positive gains.If it pushes through the 2.24, the next Fib resistance isn’t until the 2.618 at 3047.34 — only 12.6% higher than current levels.  If it can’t, then the first real support is the bottom of the gray channel, currently around 2588.

And, if that fails, then the SMA100 is currently around 2560 and the SMA200 is around 2485.  Neither of them currently lines up with any significant chart patterns, so it’s difficult to feel very confident about those downside cases in the near term.  But, the MAs are on the rise, so we’ll reevaluate in a few weeks.I’d feel much more confident if DXY would continue dropping, taking the USDJPY with it, and CL and RB would stop rallying to support the equity regime.

GLTA.