How Will the Fed's Decision Impact the Dollar's Trajectory? Which Scenarios are Emerging?
According to analysts at Bank of America, even if the Fed sends messages indicating a slowdown in the pace of interest rate cuts, significant movement in the dollar is not anticipated. Markets expect the Fed to reduce interest rates by 25 basis points, but a signal of a potential pause in rate cuts may emerge for January. The general consensus is that slowing rate cuts could have a positive impact on the dollar. However, the Fed's tendency to downplay the risks of accelerating inflation and rising unemployment concerns may offset this effect. There is also speculation that the dollar could maintain its strength through a "buy the rumor, sell the news" reaction, as expectations persist that the Fed will act cautiously with its interest rate cuts. The dollar may continue to strengthen with the anticipated hawkish Fed cut.
The effects of the 50 basis point rate cut from the Bank of Canada provide clues on how the US dollar may respond to the Fed's expected 25 basis point cut tomorrow. An upward move in the dollar is anticipated following a hawkish cut. While the Bank of Canada’s less dovish commentary has led to a rise in the Canadian dollar, it is expected that the US dollar will not encounter similar issues regarding signals of slowing rate cuts, and thus the dollar rally is projected to continue.
On the other hand, the US growth data remains strong. Inflation indicators are above target levels, and there is a significant difference posed by tariffs threatening Canadian products. Following the December cut, Fed officials are laying the groundwork for a potential upward revision in long-term forecasts, and a hawkish Fed cut remains the prevailing outlook. This situation is expected to continue driving the dollar higher.
Critical levels for the dollar's rise are noted as long positions in the dollar have reached their highest level since July, with analysts remaining optimistic about the dollar. However, the resistance at the 107 level of the DXY, which tracks the dollar against six major currencies, poses a crucial obstacle for upward movement. A daily close above this level could trigger momentum toward 108 dollars, with potential intermediate resistance around 107.5.
Currently, the strong position of the dollar globally is putting pressure on emerging market currencies. The dollar/TL has begun to test the 35 level this week within a long-term moderate uptrend. While there are thoughts that momentum in the dollar may increase post-Fed cut, it is anticipated that the dollar/TL could make a move towards the 35 region, signaling the beginning of a new record level exploration.