Short-covering of the Dollar.

I'm a little stunned by the amount of dollar bullishness that's built up over 3 whole days of upside in the dollar index that haven't even managed to put the index back above its 50 dma or above its most recent peak on July 29. A sentiment shift of that magnitude without equally bullish price action is generally a very bearish setup.

Equally stunning is the amount of bearish sentiment on gold and commodities because of this 3-day rally in the dollar, which likewise hasn't generated equally bearish price action. Consider that, despite the dollar index's rally back up to over 79 (a level last seen on July 30), commodity prices remain well above the levels that they were at on July 30th. See the chart below of the dollar index, gold, the CCI equal-weighted commodity index, WTI Crude oil, and silver.

In other words, commodities (especially silver) aren't giving up the gains that were won on the dollar's decline below 79 in proportion to the ground that the dollar index has recovered. And that sort of stickiness in the face of what “should be” bearish is actually quite bullish. Now compare that “stickiness” in gold and commodity prices to the action last July/August when the dollar first began to rally and how commodities (ex-gold to some degree) absolutely collapsed at the first hint of dollar strength.

I have no doubt that many dollar bulls/dollar deflationists are hoping for/looking for a repeat of last year's dollar rally and the ensuing collapse in commodity prices, but thus far the action doesn't support that outcome.

On the contrary, the action would seem to support the idea that the recent rally in the dollar is more than likely just another big bounce based on short covering ahead of the FOMC. And the trends that prevailed before the FOMC (i.e. - a weak dollar and rising gold and commodity prices) will likely continue post-FOMC.

Those trends may even accelerate if the Fed follows the BOE's surprise move last week and increases the size of its monetization facilities, which wouldn't surprise me in the least given the Treasury's “default or debase” dilemma. It would be a big surprise to the market though, just as it was back in March when the program was first announced.