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Dollar Drops Despite Fed Hike, More High Profile Event Risk Ahead

Dollar Drops Despite Fed Hike, More High Profile Event Risk Ahead

John Kicklighter, Chief Strategist

Talking Points:

  • As anticipated, the Fed's decision to meet expectations with a rate hike and forecast for more led to a Dollar drop
  • New Zealand GDP deflated the Kiwi's effort to recover lost ground and subsequently stalled appealing setups
  • A range of high profile event risk is ahead - BoJ, BoE, Aussie jobs, G20 - but market conditions remain range-oriented

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

The Fed injected volatility into the market, but the response from the Dollar and risk-sensitive assets to a faster course of rate hikes defied academic convention. The Greenback tumbled despite the third rate hike in the still young phase of policy tightening and signal that an additional two moves are anticipated by FOMC members through year's end. The hitch in this equation was speculation. Markets have moved to fully price both a hike Wednesday and a total 75 basis points worth of tightening through the year. What's more, hawks and bulls moved to price even more - four perhaps even five total quarter percent moves in 2017. Therefore, what is realized merely meets consensus and offers cause for the aggressive speculators to retrench. Hence, a Dollar slip.

Given the technical posture of the Greenback, the outcome of the event risk and response from the trading rank offered appealing opportunities. With a broader predisposition for measured swings, clear technical boundaries and enough fundamental motivation to get markets moving (but not forge self-sustaining trends) proved a unique confluence. Among the more remarkable instances of confluence were: the USD/JPY's bearish 115 range reversal; GBP/USD jump from 1.2100; a head-and-shoulders break for USD/CAD at 1.3450; and an aggressive rebound from NZD/USD after an extended battering. While this Dollar retreat makes sense in the context of expectations, it is not an outright fundamental falter. Projecting a sustained bear trend would overreach the event risk and market conditions. Longer-term, the inevitable catch up in policy from the ECB and BoJ - even if the Dollar maintains advantage - can guide speculators to unexpected EUR/USD climb and USD/JPY slide over time. Meanwhile, the rise in risk assets like US equities (S&P 500), emerging markets and high-yield fixed income are likely on even shorter lines. A collapse in over-extended speculative exposure built on Janet Yellen's optimism could provide opportunity and even momentum all its own.

The pace of the market is still running at two speeds. Plenty of event risk to ply bouts of volatility but an unstable structure to build trends on. That will keep interest and anxiety high for upcoming event risk like the Bank of England (BoE), Bank of Japan (BoJ), Swiss National Bank (SNB) rate decisions, a busy docket for President Trump, and the G-20 meeting of finance ministers and central bankers. Ideal situation for Pound, Yen and Franc crosses similar to the majors' response to the Fed shouldn't be presumed however. The New Zealand GDP showed just how easily event risk can throw the breaks as step on the accelerator. The strong NZD/USD recovery rally, GBP/NZD range move and productive reversal behind EUR/NZD were all halted by the week growth report. We measure out technicals, fundamentals and general conditions in the markets ahead in today's Trading Video.

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

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