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USD Strength Persists Post-FOMC Despite Potential Headwinds

USD Strength Persists Post-FOMC Despite Potential Headwinds

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EURUSD trades under $1.1780 after seeing $1.1850 post-FOMC.

- EURGBP backtest of triangle may be complete.

- See the DailyFX Economic Calendar for Thursday, January 8, 2015.

The Fed did little to dissuade US Dollar bulls with the release of its December minutes yesterday, despite developments in markets over the past few months that could have warranted a more dovish stance. Yet the Fed's three observations on markets may lead some to believe that recent price developments are welcomed, even expected.

First, the Fed sees the decline in inflation temporary due to the stronger dollar and weaker oil prices. Second, speaking of energy, the decline in prices will prove a net-positive to the US economy. Lastly, that in spite of recent market measures showing declines in inflation expectations, the risks to inflation are broadly weighted.

This outlook is not too dissimilar than what the Fed presented to us in 2011, when making the case to keep rates low despite a spike in inflation: the impacts of a weaker dollar and stronger commodity prices are transitory. Needless to say, the fears of hyperinflation were overblown, and the Fed proven correct; will it be the same now?

If the Fed is on track still for a mid-2015 rate hike - shifts in the yield curve along with consensus forecasts from banks still pin it somewhere between June and September - then there are only two major headwinds in front of the greenback presently: disappointing US economic data that provokes market participants to rethink the Fed's rate hike timeline; and overstretched short positioning in long-end US Treasuries (a short covering rally could provoke much lower rates).

See the above video for technical considerations in EURUSD, GBPUSD, and EURGBP.

Read more: FOMC Preview and ST EUR/USD Outlook

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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