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USDOLLAR Nears Major Technical Break; Don’t Trust the Euro

USDOLLAR Nears Major Technical Break; Don’t Trust the Euro

Talking Points:

- EUR/USD rallying stalling a bit as market shies away from ECB.

- USD/JPY taking a breather despite Nikkei's near -5% drop.

- As market volatility rises, it's a good time to review the "Traits of Successful Traders" series.

Given recent commentary from Fed officials, including from Fed Chair Janet Yellen at her two testimonies this week, the US Dollar needs its highest-rated economic data to start to turn here in order for future rate expectations to firm up; currently, zero rate hikes are being priced in over the next year, per the Fed Futures contract. In fact, markets now think there is a greater chance of a rate cut than a rate hike at the March FOMC meeting.

Table 1: Fed Funds Futures Contract Implied Probabilities: February 12, 2016

Fed funds futures implied probability

Deteriorating rate expectations have been the prime driver of US Dollar weakness in 2016, a development that we had been anticipating as early as the week of the Fed's December 16 policy meeting. Coming into this year, Fed funds futures contracts were pricing in a 11% chance of the Fed raising rates four times as the FOMC's December 2016 SEP projected. Now, markets are only pricing in a 11% chance of a rate hike this year at all.

Chart 1: December 2016 Fed Rate Implied Probabilities

December 2016 Fed Rate Implied Probabilities

There is a chance markets may have gotten ahead of themselves. Recent updates to the Federal Reserve Bank of Atlanta's GDPNow growth tracking index are suggesting that Q1'16 is on pace for a +2.5% annualized rate.

See the above video for an expanded conversation on the fundamentals underpinning the US Dollar and for technical considerations in EUR/USD, USD/CAD, AUD/CAD, USD/JPY, EUR/GBP, and the USDOLLAR Index.

Read more: USDOLLAR Index Flirting with Break; BOJ Meddling in JPY

--- Written by Christopher Vecchio, Currency Strategist

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