Like an idle employee who doesn't want colleagues to know they're hardly working, the Federal Reserve yesterday used all its usual buzzwords about keeping its finger on the economy’s pulse. For now, however, the world’s most influential central bank has decided to leave rates unchanged. That was widely expected.
What was more telling was the FOMC vote count. Members were unanimous on the rate decision for the first time since May.
Is this significant? It could be.
In the November vote, Esther George and Loretta Mester dissented, according to the minutes released after that meeting, "because they preferred to increase the target range for the federal funds rate by 25 basis points at this meeting.” Those two members seem to have changed their preference yesterday. Sounds dovish. In the immediate aftermath, Treasurys and the dollar sold off.
But the bigger picture tells a bit of a different story. Fed Chief Jerome Powell has made it clear throughout the last year that the Fed's biggest concern is trade. The U.S. central bank couldn’t possibly change policy days ahead of a potentially cataclysmic event on the economy — the U.S. hitting remaining Chinese imports with an additional $160 billion in tariffs, on an array of consumer goods.
If that's postponed and a partial agreement, at least, signed, even if meaningless in the longer run, some Fed members may feel more confident to increase the target range once more.
For now, the Fed signaled rates will remain low throughout 2020, but we’ve witnessed Fed rhetoric flipping 180 degrees from meeting to meeting, and sometimes even in between. The Fed is probably handling the market—and the U.S. president—with kid gloves, ahead of the crucial Dec. 15 tariff deadline, only four days after the FOMC meeting.
Perhaps, because of this very consideration, the dollar is sitting right on the fence between resuming its uptrend and beginning to slip into a downtrend.
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The dollar index broke to the downside of a bearish pennant, part of a return move to a double top. These were small patterns. However, with the downside breakout of the pennant, the dollar crossed below the 200 DMA and, at the same time, may have completed a larger, H&S top, since August.
Concurrently, the index fell below the uptrend line — and the bottom of a rising channel since September 2018.
If the dollar extends the penetration of the channel bottom, it may turn into a full-fledged downtrend. On the other hand, it could equally return to the top of its channel.
It all depends on what happens with the trade negotiations. And even then, we can’t know how the market will react. We have repeatedly noted in the past that the dollar sometimes rises both on its haven status—linked to Treasurys—and along with risk appetite. All we can do is monitor the balance of supply and demand relative to the chart.
Trading Strategies
Conservative traders should wait for a clear trade resolution to go long, with accumulation back above 98.50, or for a fall below the July 25, 95.84 trough, to go short.
Moderate traders may rely on a close below the 96.65 July lows for a short and a close above 97.50, for a long.
Aggressive traders may enter a contrarian long trade, taking advantage of a tight stop-loss below, with an upside potential toward the channel top, or at least toward the pennant, in case it holds.
Trade Sample - Long Position