The Dollar May Deteriorate after the Fed Meeting

The U.S. Dollar is strengthening, with its index up by 0.16% to 103.60 points this week. All the gains are associated with the Euro. The EURUSD dropped by 0.35% to 1.08100. The Greenback is neutral to the British Pound, while down against the Kiwi, Aussie, and Loonie by 0.3-0.8%.

The Pound will have a rendezvous with the Bank of England this Thursday. Elevated volatility may follow the meeting. The strengthening of the commodity-driven currencies like New Zealand, Australian, and Canadian Dollars happened on rising commodity prices and declining U.S. 10-year Treasuries yields to 4.04%. A drop in Treasuries yields is an obvious sign for the Dollar to weaken.

The decline of the Euro is mostly associated with the uncertain, less hawkish comments by the European Central Bank (ECB) president Christine Lagarde last week. Investors were expecting her to follow Federal Reserve’s (Fed) hawkish rhetoric. Instead, the uncertainty of the ECB positioning disappointed investors. WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) has reported a neutral capital outflows/inflows balance last week. This is the second time during the last three weeks. Investors compare this perplexity of the European regulator to the hawkish position of the Fed. This comparison results in a mostly neutral Greenback.

Bets on interest rates cut by the Fed in March have settled around 46%, according to CME FedWatch Tool. So, investors consider the second most likely option for the regulator to lower rates in March. The most likely option is that policymakers will leave the rates unchanged. The Fed has to walk on a thin ice to have the option on the table in March. This time they have to keep the uncertainty before then. If the U.S. economy would slow down by March, the Fed could lower its rates. Alternatively, it could keep them at 5.50% by April. This uncertainty does not mean the Fed should be dovish though. Quite the contrary, policymakers have to cool down investors’ expectations amid a booming stock market. Otherwise, investors may leave the Fed no choice but to lower rates in March.

From a technical perspective, the EURUSD is in a reversal position. This reversal may start at 1.07700-1.08300 targeting 1.10000-1.12000.