As Dollar Index remains within the same tight margin, it’s best to sit and watch
The U.S. Federal Reserve raised the Fed Fund Rate, (interest rate), by a quarter of a percentage point for the first time in nearly a decade this month. This ended a long debate regarding the economy’s ability to wither higher borrowing costs. The decision, which was taken unanimously by the council’s members, came in line with most market estimates. However, the Federal Reserve’s tone was mixed.
Though the Fed’s chief, Janet Yellen’s Q&A session presented assertive answers, giving the U.S. dollar a boost, equities ‘rallied even’ with the rate hike as markets regarded such a decision as an act of confidence.
Going forward, the Federal Reserve kept the door open for two possibilities: Either cut the rates or further hike them in the future, based on economic developments.
The December 16 rate hike was much needed to give the Federal Reserve the flexibility to fight a current economic slowdown and the possible disinflation in 2016, especially with oil prices remaining under pressure.
Moreover, U.S. inflation expectations remain on the downside. Inflation expectations for one year is at its lowest at 2.55 percent.
Meanwhile, Yellen also said that the Federal Reserve may study negative rates later, but only if things go against the Fed’s expectations.
Going forward, the Fed is back to being data dependent.Traders, therefore, should anticipate a notable impact on economic figures.
The most important data to look for, from now on, are inflation and business-related figures.
It is worth noting that the ISM Manufacturing PMI posted its worst reading since 2009, showing a recessionary sign after dipping below the 50 barrier for the first time since 2012.
Core Inflation remains at its lowest level since 2011, while the Fed’s target is set at 2.0 percent.
Asian and European equities rallied high welcoming the first rate hike after almost a decade of zero rates.
In the meantime, the Dollar Index remains within the same tight margin. I believe that such a movement might continue until the end of 2015, while liquidity is likely to dry ahead of the holiday season. Therefore, it would be better to sit and watch for the time being.
From a technical point of view, the 100 threshold in the Dollar Index failed to stabilize above this resistance level in December.
A one-week close above that threshold would trigger another bull run. Otherwise, a profit taking might be ahead of us, especially that the 25bps rate hike will remain priced in the markets for the long run.