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FOMC preview: will the Fed maintain or break the dollar uptrend?

The upcoming FOMC meeting sees a focus on future rate expectations amid worsening economic data. Will the Fed drive the dollar through key support to bring a wider reversal pattern?

The Federal Open Market Committee (FOMC) comes back into the fray for traders next week, with the committee widely expected to implement a third consecutive rate cut following continued growth worries in recent weeks. However, that shift is not a given, and beyond this meeting, there is a feeling that we could see a slowdown in that pace of easing.

US economic picture remains a worry

The US dollar has been on the slide over the past fortnight, with the deterioration in US data hitting sentiment for the greenback. Much of the data seen this month has painted a worrying picture for US growth, and that is likely to be reflected in Federal Reserve (Fed) decision-making. From a jobs perspective, we have seen sharp declines in both the ADP and headline payrolls numbers, hitting 135,000 and 136,000 consecutively. Surprisingly we also saw a sharp drop in average earnings, which is notable for its potential reflection of business confidence and future inflation pressure. Inflation is always going to be key for a central bank, and thus the decline we have seen in the consumer price index (CPI) should push the Fed towards easing both now and in the future. The degree to which falling inflation and inflation expectations impact the Fed outlook will be crucial at this meeting, with the prospect of future rate cuts likely to be just as important as the decision to cut rates or not.

One area of strength for the US economy has been in domestic consumption, with the resilience evident in the Michigan consumer sentiment data highlighting the driving force behind outperformance compared with many global peers.

Time to cut again?

Markets expect to see a rate cut at this meeting, with Reuters pointing towards a 91% expectation of a 25 basis-point cut. With market estimates so high, it is unlikely we will see the committee jolt markets by underdelivering. However, the interesting element of this future probability distribution is that markets are currently only pricing in another since 25 basis-point move until the Fed returns to their neutral stance. These market expectations are likely to come into focus after this meeting, with any commentary closely studied for signs of a further rate cuts. Should we see the Fed provide an outlook which signals further rate cuts beyond the two laid out below, there is a good chance we will see further downside to come for the dollar.

Where now for the dollar?

The greenback has been on the slide over the course of October thus far, with this month on track to represent the worst month for the dollar in 21 months. This monthly chart also highlights the inside trendline resistance that has been the source of any downside within the course of 2019. If we look at this past year, it has seen a very consistent uptrend, with each pullback providing a subsequent rebound into new highs. However, the question for traders is whether we will find ourselves in a situation where this trend breaks and a wider decline in the dollar comes into play.

The weekly chart provides greater detail to this uptrend, with the use of a standard deviation channel providing a good outline of the general direction of travel over that period of time. This recent decline clearly remains within this trend, raising the chance of a rebound in the near future. With the stochastic oscillator moving into the 29-33 zone, there is a chance that we could once again see this retracement come to an end around the time of this Fed meeting. The key is whether we see the dollar break through the June low of $95.33 or not.

Finally, a look at the daily chart highlights the recent respect of the 61.8% Fibonacci retracement level, with the price starting to rise since. Given the perspective that we are currently seeing a retracement of the $95.33-$99.23 rally, this respect of the Fibonacci support level is important. With the stochastic on the cusp of a break through the 20 level, we could be looking at another bullish signal. The chart below highlights three occasions where we have seen the stochastic reverse up through the 20 mark; each of which would have provided a good buying opportunity. As such, look out for such a cross for a possible bullish signal.

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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