We have been pontificating over the last few days – and weeks for that matter – about our bullish outlook for the Dow Jones FXCM Dollar Index (ticker: USDollar). We have constructed a very solid fundamental and technical argument and have even been aided by the effective removal of the franc as a safe haven currency, also USD positive. However, early Wednesday morning this whole argument could come crashing down, be torn to shreds as the Fed prepares to announces its policy decision at the end of its two-day meeting later in the day. Should the Fed announce a third round of quantitative easing (QE3) the US dollar is likely to weaken significantly intraday and in coming sessions as the market digests the news that the Fed is getting its printing presses started again. Over the medium-term the effect of QE3 shouldn’t be as USD negative as the previous rounds of easing due to the broader market conditions; euro weakness, franc peg and so on. However, it will certainly curtail the massive topside gains that we have been forecasting for the dollar index in coming weeks and months.
Therefore, at this juncture, early Wednesday, we stand on the sidelines waiting to see the FOMC result so we can make a better assessment of the dollar index outlook. We should also point out that if the Fed elects not to enact further easing we should see the buck benefit and our topside forecasts play out. Watch this space.
Written by Jonathan Granby, DailyFX Research Team