The U.S. dollar was little changed as market awaits Wednesday’s Fed rate hike. The dollar index remains near multi-year highs but slightly off the November 24th high of 102.12. The Fed fund futures is currently pricing in a 100% chance of a rate hike, the first hike since last December. The US economic data since the November Fed meeting has been mostly strong and bullish for the US dollar.
The Fed is expected to raise rates by 25 basis points, but if we see a surprise 50 basis point hike we could see the dollar index soar and take out the November highs. If we only see a 25 basis point hike, we will see the focus come on the dot plot forecast and Janet Yellen’s forward guidance. Currently investors do not expect the Fed another rate increase until June 2017.
If we see Yellen signal a long pause following a December rate hike, we could see the US dollar weaken across the board. If the Fed signals a need for more tightening, we could see the dollar take out key multi-year highs against all of its major trading partners. The most likely scenario however is for the Fed to provide no forward guidance. If that happens we could see a soft dollar.
The US dollar index 240-minute chart shows that 102.12 level remains critical resistance. If we see the dollar selloff, we could see key support come from the 99.00 level. It is around that area that price could form a bullish Gartley pattern. Point D is targeted with the 50% Fibonacci retracement of the X to A leg and the 127.2% Fibonacci expansion level of the B to C leg. If valid, we could see a rebound towards the $100.50 region. If the pattern is invalidated, price could target the 97.50 level
The trade: Buy Dollar Index at 99.00 with a stop loss at 98.50 and take profit at 100.50. The risk/reward ratio is 1:3