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US Dollar Stability Contingent on Data Pre-FOMC

US Dollar Stability Contingent on Data Pre-FOMC

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- USD/JPY technical structure weakens as EUR/USD's strengthens.

- Emerging market currencies' pressure may be attributed to FOMC.

- Read why a Fed rate hike in December may not be bullish for the US Dollar and see how it fits with the December seasonality forecasts.

With the Federal Reserve eying its first rate hike in almost a decade next week, attention has shifted from what the Fed will do now and instead what the Fed will do later. That's to say, while we believe that a Fed rate hike is a "lock" after the November NFPs, markets have started to look down the line at the projected path of future policy rates.

Deflating future rate expectations and thus narrowing interest rate differentials may be working against the US Dollar in the short-term. This is a concern going into the December 16 policy meeting because the FOMC has showed the proclivity to lower expectations for the path of future rates at recent meetings featuring updated Staff Economic Projections – which the upcoming meeting will be accompanied by.

Table 1: Changes in FOMC Dots/Glide Path

US Dollar Stability Contingent on Data Pre-FOMC

In just the past three meetings alone, we’ve seen the Fed start to lower expectations for the future policy path. For example, in the March 2015 Staff Economic Projections, the FOMC was looking at 1.875% as the year-end rate for 2016; by the September meeting, this forecast was lowered to 1.375% - one rate hike fewer than previously anticipated.

If that were to hold, the Fed would need to raise rates roughly every other meeting in 2016 - an unlikely outcome at this point in time. Another downgrade to these expected future rates would very much be consistent with what the FOMC has done in the past few months.

See the above video for technical considerations in EUR/USD, GBP/USD, USD/JPY, NZD/USD, EUR/NZD, GBP/JPY and the USDOLLAR Index.

Read more: JPY Well-Positioned as Latest Flurry of Central Bank Activity Disappoints

Lastly, as we approach the holidays and thus less liquid markets through the end of the year, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

--- Written by Christopher Vecchio, Currency Strategist

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

Follow him on Twitter at @CVecchioFX

To be added to Christopher's e-mail distribution list, please fill out this form

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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