USDOLLAR Index Consolidates in Bull Flag Post-FOMC
- EURUSD back below $1.1000 as headlines from Greece re-emerge.
Yesterday's FOMC shook out as expected: the Fed took on a modestly hawkish tone, with several disclaimers as to why they wouldn't pre-commit to interest rate hikes. Price action around the meeting was rather fickle, with markets first taking the stance that the Fed's view that the economy was "nearly balanced" would deter them from raising rates in September, to then the position that 'data dependency' means a September rate hike is very much alive.
In either case, we're going to continue to monitor the USDOLLAR Index as it too is behaving in a technical manner that would imply the Fed was a bit more hawkish yesterday than appeared at first blush. It seems there is still a rather significant driver afoot: the differential between when markets are pricing the Fed to raise rates; and when the Fed is telling markets it may raise rates.
In this particular scenario, with the market more dovish than the Fed (the market is pricing in a January 2016 rate hike, while various FOMC members have indicated that September 2015 is possible), there may be a floor under the US Dollar. If data gets worse, and Fed policymakers are forced to tone down their narrative, then the market is already pricing in that outcome; however if data stays the course, traders may find themselves behind the eight ball, and forced to rapidly adjust interest rate expectations upwards, providing a veritable source of support in the weeks ahead.
--- Written by Christopher Vecchio, Currency Strategist
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