It Always Comes Back to the Currency

02/05/2016 9:00 am EST

Focus: CURRENCIES

James Stanley

Trading Instructor, DailyFX Education

The US dollar is still within a bullish pennant formation and James Stanley of DailyFX.com points out that should support develop over the next couple of days, this can be an attractive area to begin getting long the greenback.

The largest growing divide in markets just grew a little bit more and that’s the divergence between the Federal Reserve and the market’s expectations for rate hikes in 2016. The most recent batch of projections were provided in the dot plot matrix at the December Fed meeting, when the bank hiked rates for the first time in nine years. In those projections was the expectation of the Federal Reserve to embark on a full four rate hikes in 2016. This was met with wide skepticism as we’d just spent the entire year of 2015 bantering about should they, shouldn’t they and when the bank was finally able to lift-off, they were trying to do so while carrying an unliftable caboose of telling markets they were going to hike four times in the next year. This is why we’d classified rates as being the biggest risk moving into 2016; as that had appeared to be the primary pressure point that had further exposed weaknesses in Asia and Commodities, the other two pressing themes as we came into 2016.

But this was also the easiest risk to offset. We had warned of this just a couple of weeks ago as pressure in global markets began to increase. Because the Fed could simply say ‘no’ to additional rate hikes and that pressure could recede while bigger themes in Asia or Commodities had already begun to take on a life of their own: Higher rates out of the United States just hastens the development of each. This has become somewhat of a pattern over the past six years as QE has come into play. As the Fed would go with less loose monetary policy, markets would sell-off. This would be met with the eventual submission by the Fed for even more loose monetary policy and this process went on for about five years. To see the chart and read the entire article click here…

By James Stanley, Trading Instructor, DailyFX.com

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