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Talking Points:

- The US Dollar has fallen hard in the wake of the December FOMC meeting, breaking through a number of key levels in the process.

- Both EUR/USD and USD/JPY are moving in manners that suggest more US Dollar weakness is set to come.

- Retail traders are net-long the US Dollar and adding to their positions, a contrarian indicator for more weakness ahead.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

The US Dollar (via the DXY Index) recovered some ground in the immediate wake of the December FOMC meeting but took a sharp turn lower during the Asian and European sessions, a clear sign that foreign investors are taking the Fed rate decision a bit more critically than their American counterparts did yesterday afternoon.

Market Pricing Hasn't Budged Post-FOMC

As the Federal Reserve downgraded its GDP and inflation forecasts for 2019, it made a corresponding move to its interest rate glide path via the dot plot. Whereas the US Dollar initially benefited from the Fed continuing to guide for two hikes in 2019, it's clear now that investors around the world don't believe that conditions will warrant such a path of tightening.

In the wake of yesterday's decision, following activity in Asian and European markets today, Fed funds futures are still pricing in June 2019 as the most likely period for the next 25-bps rate hike - and that's it. No more hikes are being priced in for 2019, and markets are still biased towards a rate cut in 2020. That market pricing hasn't moved back towards the Fed keeps the previous pricing dissonance in place, much to the US Dollar's detriment.

As a result of the post-FOMC price action, the technical damage done to the US Dollar (via the DXY Index) is materially important, suggesting that the buck may have topped out for the foreseeable future.

DXY Index Price Chart: Daily Timeframe (June to December 2018) (Chart 1)

DXY Index Threatens Major Breakdown as USD/JPY Falls Post-FOMC

The symmetrical triangle in place since over the past six-weeks has started to break to the downside. The December 10 bullish outside engulfing bar low at the daily 50-EMA - a level of trend support tested and held on numerous occasions since first breaking above it on September 27 - has started to crack; validation for a bearish breakdown would need to come in below 96.36. In turn, the rising trendline from the April and September 2018 lows is under pressure; a weekly close below said trendline would provide another piece of evidence for a US Dollar top.

Read more: US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)


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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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