We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Bullish
Oil - US Crude
Mixed
Wall Street
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Mixed
USD/JPY
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
More View more
Real Time News
  • The #Euro is the big driver here for DXY as it is 57% of the index. It is rising now and trying to break above the March 27 high at 11147. Get your $EURUSD technical analysis from @PaulRobinsonFX here:https://t.co/6gt3F9LuGP https://t.co/73SaL5AeXD
  • U.S. Market Analyst at https://t.co/JsVsSmefgR, Shain Vernier covers - ✔️ Safe haven assets in volatile markets ✔️ Central banks and governments ✔️ How will commodities trade in a recession Only on Trading Global Markets Decoded #podcast. Tune in here: https://t.co/1UmEzEbwiy https://t.co/EIC9YqfTec
  • Anybody else think that casting directors in movies are some of the most underrated people when it comes to giving a film/series credit?
  • No https://t.co/EoBltaP17k
  • Crude #oilprices may face heightened liquidation pressure as the cycle-sensitive #commodity finds itself under the pressure of resilient resistance and a vulnerable, multi-week rising channel. Get your crude #oil market update from @ZabelinDimitri here: https://t.co/cGPX4qcOH1 https://t.co/0U4JMJVFuf
  • The @ecb will likely boost its Pandemic Emergency Purchase Program at Thursday’s meeting of its Governing Council; a move that could give the #Euro a lift. Get your currencies market update from @MartinSEssex here: https://t.co/I4PbmJNG1z https://t.co/hu6Ld1KdDB
  • $GBPUSD doesn’t have the cleanest set of technical indications, but #USD may give indications if it can break its trading range via the $DXY. Get your currencies market update from @PaulRobinsonFX here: https://t.co/PrC9wAaXvU https://t.co/vHYHflwqR3
  • The ongoing contraction in US production may keep #oilprices afloat in June as crude output falls to its lowest level since October 2018. Get your crude #oil market update from @DavidJSong https://t.co/jj1bMLX0DF https://t.co/O9NOqbfHkb
  • watching the #SpaceX launch🍿
  • Major investment bank models have touted USD selling, given the outperformance in US equities relative to its counterparts over the past month. How is this likely to impact the month-end rebalancing? Find out from @JMcQueenFX here:https://t.co/MtNrHmXZpD https://t.co/d00z4019XE
Fed Rate Expectations Rising but USDOLLAR Breakout Losing Steam

Fed Rate Expectations Rising but USDOLLAR Breakout Losing Steam

2016-05-26 12:00:00
Christopher Vecchio, CFA, Senior Strategist
Share:

Talking Points:

- Fed funds now implying Fed would first hike in July.

- US Dollar struggles as risk appetite improves broadly.

- Higher volatility in FX markets should have implications for your trading strategies.

The US Dollar, which had been on a tear through May, recently hit a wall. After a string of improved US economic data and optimistic, hawkish Fed speakers talked up the chances of multiple rate hikes this year, market participants finally stopped offering the greenback lower at the start of this month.

Just last Wednesday, the April FOMC minutes itself confirmed this notion, making clear a rate hike in June is possible. The US Dollar, which had been rallying previously, saw price extend to fresh monthly highs just short of 11980, converging with rate expectations for a June hike around 36%.

It seems that the USDOLLAR Index and market expectations for a Fed hike are once again intertwined. Over the past week, the odds of a June hike have subsided marginally to 34% (see table below), and in turn, the USDOLLAR Index has crept back below its closing level (11950) after last Wednesday's April FOMC minutes release.

Table 1: Probability of Rate Hikes across Upcoming Fed Meetings

Fed funds futures contract implied probabilities July 2016 hike

Traders may have 'taken the hint' that the April FOMC minutes made clear: market expectations for a June hike "might be unduly low." Noted - and now the market seems to be in compliance.

Nevertheless, with rate expectations for June stalling, traders seem to need more evidence before committing to the idea that the Fed will raise rates next month. Markets are now pricing in July as the most likely period for the first rate hike, with the odds of a hike having jumped to 54%. Correlation is not causation, but the Fed has not raised rates unless market participants have priced in at least a 60% chance in the front month of them doing so. By this logic, September remains the "most likely" period for action, at least by the market's POV.

Moreover, considering that July is a month without new economic projections, we're highly doubtful that the Fed would suddenly hike rates without having data in hand and/or a podium for Chair Janet Yellen to speak from to try and soothe the masses thereafter (which is the case at each meeting when the new economic projections are released).

The USDOLLAR Index has sagged without the continued rise in June rate hike expectations, even as the market has pulled forward the likelihood of action in July or September. This poses a problem, as the USDOLLAR Index has been trying to breakout of the downtrend governed by the January and February 2016 highs (chart below).

Chart 1: USDOLLAR Index Daily Chart (November 2015 to May 2016)

Fed Rate Expectations Rising but USDOLLAR Breakout Losing Steam

In the short-term, it's important that the USDOLLAR Index holds above its daily 8-EMA on a closing basis, which it's trading back to a present time. Price hasn't closed below the daily 8-EMA since May 4, and a breach of this trend would offer good reason for pause to any near-term bullish forecast.

The daily MACD and Stochastics indicators are in bullish territory but losing their upside bias more quickly these past few days, suggesting momentum is starting to cool. Failure below the daily 8-EMA would draw attention to the 11910/20 region below, where price had previously carved out a number of intramonth highs during April.

If the USDOLLAR Index does return to the topside, look no further than EUR/USD to be front and center, given the pair's thinnest net-short positioning in about two years. Likewise, the pair is currently trading back to trendline support from the December 2015 and March 2016 lows as its daily MACD and Stochastics break into their bearish territory (chart below).

Chart 2: EUR/USD Daily Chart (January 2015 to May 2016)

EUR/USD daily chart

The next few days could be key for EUR/USD - especially as we finish out the most bullish month of the year for the US Dollar (on a twenty year seasonality basis).

Read more: Positive News Flow Past 24-hours Boosts Risk, Holds Back US Dollar

If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.

--- 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.

DISCLOSURES

News & Analysis at your fingertips.