What’s Happening?

Since the US election, USD has been on a tear with traders pricing in a more aggressive series of interest rates increases going forward. In so doing the dollar has become very technically overbought and vulnerable to a potential correction. The statement and member projections coming out of the Fed meeting Wednesday could give a better indication of whether hawkish speculation has gone to far or not and could spark a correction.

 

Technicals:

Oil has been climbing strongly since September becoming seriously overbought on the RSI indicator twice in the process. A strong rally up from 96.00 after the election appears to have run out of gas near 102.00. Lower highs this month suggest emerging distribution while the RSI falling back toward 50 indicates upward momentum has faded back to neutral with a downturn possible.

In a correction the 100.00 round number of a Fibonacci cluster just above 99.00 could potentially be tested.

 

Fundamentals

With the Fed having run out of meetings this year, the US economy doing well, the job market near full employment and inflation rising, an interest rate increase  this meeting looks like pretty much a done deal.

Prior to the US election the US Dollar index near 95.00 had been pricing in two interest rate increases over the next 12 months. The rally up to 102.00 suggests traders have gone to pricing in 4-5 rate hikes between now and next year (one this week and one per quarter through December 2017)

The Fed statement and dot plot may give a better indication of what the Fed is actually thinking. Fed Chair Yellen has been reluctant to raise rates and with 2017 being the last full year of her tenure and someone else likely to take over in January 2018, a big shift for her to the hawkish side appears unlikely. Based on this I think we’ll see two rate hikes in 2017 rather than four.

Still, in the statement keep an eye out for comments about the US economy and inflation. Rising inflation pressures could force the Fed to act more aggressively in 2017. The market has been anticipating fiscal stimulus from a Trump administration could be inflationary but those impacts may not be felt until late 2017 or even 2018.

The much maligned dot plot of Fed fends forecasts could also have an impact. The street has priced four 2017 rate hikes into the US Dollar. If the main group of dots comes in less than that we could see a big correction in USD which could life the lid off currencies the USD rally has put under pressure particularly the really depressed JPY and Gold. EUR, GBP plus resource currencies like AUD and CAD have already started to rebound.