Recent headlines have been all about the US Dollar and how weak it has been trading. This is because inflation data has come in softer than expected and subsequently adjusting the expectations for future FOMC rate hikes. The chart above depicts the strong correlation between the US Dollar Index and CPI.



The recent decline in inflation data appears to be rather unexpected as the dollar index has dropped substantially over the past 2 weeks. This drop has been so extreme that the RSI has moved to a level of 24.75. This is considered an extreme oversold condition. On top of this, the index has also moved outside of the lower Bollinger band. This indicates more than a 2 standard deviation drop in price, another indication of oversold conditions.



When we look at a long-term chart of the US Dollar Index, we can see those previous periods where the daily RSI indicator dipped below 30 proved to be significant support levels for the dollar. While each rally was different, some short lived and others leading to long term trend changes, these RSI levels typically proved to be important support levels. Subsequently, there is a high probability that the index decline takes a pause, and we may even see a short-term rally. Ultimately for now, the long-term trend is still lower.


Remember, the trend is your friend. Be patient and use the data to filter though the noise and listen to the signals.