Last week the U.S. dollar hit its highest point in eight months and while there is stills some room for prices to move higher, it appears the tide is starting to turn.
The U.S. Dollar Index briefly popped above 99, its highest level since Feb. 1 and so far prices are holding, last trading at 98.450. This week could be a big week for the greenback as everyone is focused on the Federal Reserve’s monetary policy meeting and statement to be released at 2 p.m. Wednesday.
Although markets aren’t expecting much from this meeting, it could set the tone for December, which could be bullish for the U.S. dollar as this is when the U.S. central bank is expected to raise interest rates.
Markets saw a similar move last year when the USD Index pushed above 100 ahead of the December Fed meeting, which saw the first rate hike in a decade. I am expecting to see a similar move this year, with 100 being the key support level.
The question is: will December going to be the start of a new bull market for the U.S. dollar or a reversal of its uptrend that was established in 2014.
The U.S. dollar has been in a long-term consolidation pattern since the start of 2015, after seeing strong gains the previous year. The expected rally in the next month would be the third long-term test of the 100 level and if it doesn’t break then I would expect to see lower prices.
The key for me in December will be the trajectory of U.S. interest rates, which has been in a down trend since 2013. U.S. central bankers have been consistently lowering their interest expectations, which three years ago as around 4%, at the last meeting long-term forecast dropped below 3%.
The reality is that we are in a lower for longer interest rate environment and I am expecting the U.S. dollar to weaken next years as the European Central Bank cuts back on its stimulus measures, narrowing the interest rate gap between the two currencies.
If, as I expect, the 100 level creates massive selling pressure in the U.S. dollar, the first support level to watch will be 97.4 and then at 96.4.
So for now be patent and wait for the right time, which I expect will be directly after the December FOMC meeting.
