Talking Points:

- The US Dollar continues to drive lower as expectations for near-term rate hikes out of the United States dwindle lower. But the Fed hasn’t relented yet, and while they may not hike at their next meeting, we can certainly see a ‘hawkish hold’ scenario similar to last year; and this could reinvigorate the Greenback.

- While discussing a meeting in three months might seem pointless to many traders, in a Central Bank-driven market, these themes can carry a pervasive impact to price action across markets; and this uncertainty around near-term FOMC policy can create opportunities on both sides of the market. Traders can look to buy Dollars against weak assets (potentially, the Yen), or sell Dollars against strong assets (like Gold or potentially, GBP).

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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Matters change quickly in Central Bank-driven markets. Just a week ago it seemed as though a rate hike in September may actually be on the table for the Federal Reserve; and while not probabilistic, this at least seemed like a possibility with strong odds for a hike by the end of 2016, at the very least. But one slight miss on an NFP report and another fairly disappointing ISM survey helped to extinguish those hopes really quickly, and over the past week the US Dollar has fallen from near-term resistance down to support as expectations for a hike by the end of the year have fallen to below 43%.

This contributes to the building tension as we near the next FOMC decision on September 20-21. On the chart below, we’re looking at the current technical setup in the US Dollar after rate hike expectations out of the US drove prices down to previously-established support.

Is the U.S. Dollar Done Until December?

Created with Marketscope/Trading Station II; prepared by James Stanley

So, with odds for a hike in September looking increasingly less likely, many traders have begun to steer their attention to the next big Fed meeting in December. There is a meeting in November, but there’s no press conference and this decision takes place just one week ahead of the US Presidential election; so while Ms. Yellen will surely mention that November is a ‘live meeting,’ we probably won’t be seeing too much by way of new events. Deductively, December becomes more interesting, and this somewhat follows the model that the Fed had used in 2015; posing a ‘hawkish hold’ in September followed by an actual rate hike in December. So, this begs the question:

Is the US Dollar Done Until December?

Probably not: While the pace of recent data out of the US has been slow-to-bad, the Federal Reserve has been rather persistent towards talking up higher rates, and this goes all the way back to last year. Coming into 2016, the Fed expected to hike as many as four times for up to 100 basis points of tightening; and this is after the U.S. economy spent more than five years with rates at 25 basis points. After risk markets collapsed at the beginning of the year, that expectation was driven down to ‘two’ from the previous ‘four,’ and since then the Fed hasn’t stepped back from this stance.

The big disconnect appears to be one of scope: While many are expecting the Fed to stay loose and passive in response to global risk factors and an unconvincing US economic recovery, others look at rates relative to historical levels to denote that we’re (the entire world) still very much employing ‘emergency-like’ policy. This would be similar to a trader seeing an uptrend on a 5 minute chart but a downtrend on the monthly chart; the same problem being addressed from radically different vantage points.

More likely, we’re going to continue to hear the Fed volleying rate expectations in the coming months similar to what we saw last year; and to make matters more difficult for traders and markets, this will likely be done through commentary, interviews and media engagements. Or, to put it otherwise, you don’t really know where these signals will come out, or when; and traders need to remain vigilant as a primary risk factor may become even more unpredictable.

On the chart below, we’re looking at major inflection points in the S&P 500 around such FOMC commentary; and one of the big drivers for Fed hawkishness is likely the fact that the S&P continues to trade near all-time highs while the Fed is still heavily-engaged with ‘emergency-like’ monetary policy.

Is the U.S. Dollar Done Until December?

Created with Marketscope/Trading Station II; prepared by James Stanley

Does this make the US Dollar Untradeable?

No, but this does mean that the trader needs to be prudent about picking their spots, as a market devoid of a clear macro driver may have a tendency to lack concerted direction. This is similar to what we’ve been talking about of recent around positioning and exposure in USD based on prevailing themes.

For traders that want to take a bullish stance on the US Dollar, look to match that up with currencies that may have a bearish driver or bias behind them. The area that we’ve been looking for this scenario has been the Japanese Yen as expectations are ramping up to see even more stimulus from the BoJ in the coming months. Traders looking to act on this theme can wait for the US Dollar to drop to support against the Japanese Yen, likely being driven by some form of dovishness or implied dovishness from the Federal Reserve; at which point they can look at triggering into the position. On the chart below, we’re looking at the current setup in USDJPY as price action is approaching a prior zone of support from the ¥100.40-100.00 area.

Is the U.S. Dollar Done Until December?

Created with Marketscope/Trading Station II; prepared by James Stanley

And on the other side of the coin, traders looking at bearish stance on the Dollar with the expectation that longer-term support levels will break can look to sell the Greenback against Gold or, perhaps even the British Pound. For such an approach, traders would likely want to wait for the Dollar to run higher as driven by more hawkish Fed commentary or expectations; at which point they can look to buy support in Gold in anticipation of the Fed inevitably relenting from that hawkishness.

Given the Dollar’s recent deluge, Gold prices are looking quite frothy and this can make top-side entries a bit more complicated until the technical structure builds further. But should the Fed pose a ‘hawkish hold’ at their next meeting, this could elicit a spate of USD-strength, at which point support entries in Gold could become possible. On the chart below, we’re looking at potential areas to try to catch support in Gold.

Is the U.S. Dollar Done Until December?

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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