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FOMC preview: dollar sides into key support ahead of meeting

The FOMC insurance rate cuts appear to be over, yet trading opportunities remain with the dollar approaching a crucial support zone.

Federal Reserve Source: Bloomberg

Market expectations price in a rate hike

Wednesday 11 December brings the eighth and final FOMC meeting of 2019, wrapping up a year that saw a second half dominated by a reversal of the rate rises seen in 2018. US President Donald Trump has been piling the pressure on Federal Reserve (Fed) Chairman Jerome Powell to do more, yet there is little belief that the committee will follow his demands.

In fact, market expectations currently price in a higher chance of a rate hike (3.8%) at this meeting than a rate cut (0%). However, markets see little chance of a rate hike in 2020, with growing rate cut hopes pointing towards a cut in June.

Fed probablities

With the Fed clearly within a holding phase, markets will be sensitive to shifts in the economic data points that will shape group thinking as we move forward. The first of those will be the US jobs report, with markets widely expecting to see an improved showing for the payrolls number following a somewhat uninspiring 128k reading. With earnings growth falling from 3.3% to 3% in recent months, traders should keep an eye out for whether this becomes a bigger story.

GDP and unemployment projections taking centre stage

As for the meeting itself, the release of updated forecasts will add another element to circumnavigate. Of particular attention will be the gross domestic product (GDP) and unemployment projections, with any move likely to bring about heightened volatility for the dollar.

Ultimately, the three ‘insurance cuts’ embarked upon in 2019 have shifted the Fed back towards the pack. That is likely to please the doves in the committee, with many likely to await any major breakthroughs in trade war negotiations to see where we go from here. The worries over an inverted yield curve have faded, taking much of the pressure off the committee to act. Nevertheless, with the latest jobs number accompanied by updated economic forecasts, markets will be on the lookout for any shift in tone from the Fed.

Dollar on the slide

The dollar has been losing ground this week, with the price falling back towards trendline support. Trading within a rising wedge formation over the past two years, the dollar index looks likely to break lower at some point. A decline below the 96.72 level in particular would begin to build a story of such a long-term reversal coming into play.

DXY weekly chart Source: ProRealTime
DXY weekly chart Source: ProRealTime

On the four-hour chart, the recent completion of a double top formation points towards further downside. The sharp decline seen today brings us towards trendline support, with a high chance of a short-term rebound after this sharp move lower.

However, such a move would be deemed a precursor to further downside unless we see a break through 97.37 resistance. As such, with the price moving into a major area of support, the direction established throughout the coming week will set up the dollar direction for the weeks ahead.

DXY four hour chart Source: ProRealTime
DXY four hour chart Source: ProRealTime

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