Perhaps the single most dangerous move an asset class can make is a “false breakout.”
A false breakout occurs when an asset breaks out of a consolidation pattern, only to reverse. The reason why this development is so dangerous is because the reversal is typically both sharp AND violent as momentum chasers and trend-based algorithms “panic sell.”
I bring this up because we may have just witnessed a false breakout in the single most important asset in the world: the US Dollar.
The US Dollar is the reserve currency of the world. It comprises 86% of the currency markets, over 70% of foreign reserves, and is the currency denominated over 60% of global debt.
Put simply, the US Dollar is THE single most important asset in the world. What it does has a PROFOUND impact on the rest of the financial system. Which is why a false breakout in the US Dollar can have TREMENDOUS import for investing going forward.
Having said that, the US Dollar was trading in a consolidation pattern from the middle of June until the middle of August. It has since staged a breakout to the upside, which both the financial media and the vast majority of investors took as “the real thing.
It’s very likely not. The $USD is in fact forming a massive Head and Shoulders pattern right now. This pattern suggests the $USD will be dropping hard into the mid’80s in the coming months.
What would trigger this?
The Trump administration signing a trade deal with China. The Trump White House weaponized the Fed to strengthen the $USD for leverage in trade negotiations. But that will be stopping soon. We are already receiving signals that the Trump White House will have this issue resolved before November.
U.S., China Plot Road Map to Resolve Trade Dispute by November
Source: Wall Street Journal
That’s a heck of a “tell” from the markets. And it's "telling" us that we're about to see a major inflationary move as the $USD drops hard.
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Chief Market Strategist
Phoenix Capital Research