Just a day before the Fed meeting on monetary policy and the US Dollar strengthened across the board against the rest of the global currencies. The US currency recorded mild gains against the Euro and the Pound as we are finally about to find out what the Fed will do and more importantly what their intentions are for the next year.
We say that because it’s pretty much a done deal that the Fed will raise rates, Janet Yellen has been clear about it, her colleagues have been clear about it and market participants don’t really doubt that the central bank will start normalizing their interest rate policy this month. However, what is unclear and could very well dictate the price action after the decision announcement is the way the Fed will decide to prepare investors for their next moves.
Consensus opinion is that the US central bank will opt to remain dovish in light of the challenges the global economy is facing: stagnating inflation in most developed economies, a slowdown in global growth and consumer demand and a severe drop in oil prices. As such there are many analysts and investors that believe that the Fed will hint that their next moves will be dependent on future data and/or to be timed right. We explained in our yesterday’s note how the Dollar is expected to trade on the back of such a development.
Should the Fed however decide to be bold and appear more bearish than expected and possibly name approximate dates for their next moves then the Dollar will soar against its peers. Investors will rush to readjust their portfolios in light of the increased confidence the Fed might appear to have and we will see a rally for the Dollar during the last 2 weeks of the year. This is not the most likely scenario but nevertheless we believe that our readers should be aware of it as well.
Price action in the majors yesterday was generally pro-Dollar with the US currency posting gains against the Euro and the Pound. The Single currency is trading around 1.0940 this morning having tested the 1.0900 support and the 200-period EMA around the same level. The ZEW Survey printed better than expected but the bias was in favor of the Dollar 24 ahead of the Fed meeting. The Cable turned lower as well losing the 1.5100 support and trading around 1.5050 this morning.
Before the Fed meeting we will have the opportunity to find out more about the PMI levels in the Eurozone and the employment data from the UK but we expect traders to remain cautious ahead of the main event of the day and limit any major trading moves.
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