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Is the Dollar's Rally the Fed's Doing and Is it Sustainable?

Is the Dollar's Rally the Fed's Doing and Is it Sustainable?

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar has fueled its largest two-week rally since it found its peak back in XX 2015
  • This charge has come alongside key breaks for EUR/USD, GBP/USD and USD/JPY that contrast general range constraints
  • Motivation for this move has been frequently assigned to Fed rate expectations more for expediency than practicality

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

The Dollar has made an impressive run over the past two weeks. That is abnormal given the struggle by many other currencies and markets to break from range. Given the rarity of trends across the financial system and consolidation tightening the viable trading bands amid more permeable technical levels, there is appetite to find trade opportunities through more traditional trading approaches. And, that frequently leads to justification of dubious conditions rather than patience for the convincing alignment of conditions to support appealing setups. Is the Greenback genuinely breaking from the surrounding market - perhaps ushering in a broader change - or is this another short-lived spark of volatility that will not catch?

Denial of unfavorable conditions begins with rationalizing the Dollar's remarkable move beyond a short-lived fundamental wind. It seems much of the bullish attribution is assigned to a swell in interest rate expectations. The probability of a November 2nd rate hike has not gained any traction in the past weeks and currently stands at a meager 17 percent. The chances for a December 14th move have seen a steady climb, however, and currently stand at a 68 percent chance. That is remarkable, but draws question as to why it would be relevant as a driver now. Fed fund futures have given a better-than-even chance of a hike at the year-end meeting since mid-August. More importantly, full confidence is naturally not to be found until the actual move as complacency has held strong through 2016. It would be difficult to feed the Dollar's climb on this theme.

Another, perhaps more productive, source of strength for the Dollar is the weakness of its major counterparts. A collapse from the Pound and more controlled slide for Yen and Euro are good platform for the dominate reserve currency. Yet, those depreciations are beholden to the same lack of trend send through the financial system. Unless there is an unforeseen fundamental wave coming to support the Dollar or this currency is signaling a seismic change for the entire system, it is very improbable that the run sustains itself. That creates a quandary for those that have been drawn to the tentative trends for EUR/USD, GBP/USD, USD/JPY and NZD/USD. Should we remain skeptical of the Dollar's potential or prep immediate trade scenarios? We focus on this currency in today's Strategy Video.

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