Over the past week or so we have noted the growing USD divergence between price and daily RSI, as the dollar continued to rally versus multiple currencies, while the underlying oscillator failed to confirm the move higher. Finally, the sharp USD reversal has ensued over the past few sessions as market participants came back to reality – Pushing back their expectations of Fed QE “tapering” at next week’s June meeting.

This has been our assertion all along as from a strategic perspective it makes little sense to taper asset purchases in the very next meeting after the FOMC added “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes” in their May statement. Furthermore, the recent decline of inflation over the past few months has some members of the Fed even contemplating the validity of tapering altogether, since they are nowhere near the committee’s 2.0% objective with April core-PCE at 1.05% YoY.

Ultimately, we won’t know more until the actual FOMC decision next week, but heading up to it we could see the USD give back some of its gains over May and June.