TradingCenter Forex Report January 2016 –The US Dollar Index (USDX)

Our Previous Forex Trading Signal

In our previous trading signal (November 2015) we have stated that December shall be a good month for EUR against the USD. Actually, EURUSD reached even 1.05 in the early days of December 2015 before making a strong move lifting the pair up to 1.1059. After the Fed rates hike in the middle of December, EURUSD moves within the channel 1.07 and 1.098.

Fed Rates Hike –What Happens Next

In December Fed raised US interest rates by a quarter ending a long era of near-zero borrowing cost. That decision affects every aspect of our financial universe, including the Forex Markets and the USD exchange rates, the bond markets, the equity markets, and the commodity markets. Don’t forget that the price of every financial instrument has to compete with the risk-free returns of the interest rates.

Forecasting Upcoming Rate Hikes based on CME Futures

The USD rates are expected to rise 1.50-75% in the next 2 years. Based on the CME Group 30-Day Fed Fund futures prices, there is 50.3% probability for a further 0.25% lift in March 2016. The pace of Fed monetary tightening in the 2nd half of 2016 might prove higher. In total, the median forecast suggests that the Fed is going to raise rates by 0.50-75% in 2016 and a further 1.00% in 2017.

The Impact on the US Dollar and EURUSD

In numerous TradingCenter Forex reports during the past 15 months, we have stated that 2015 will be the year of US Dollar. Indeed, 2015 proved an exceptional year for the US Dollar. But can 2016 prove as good as 2015 for USD?

In four of the past five Fed interest rate hike cycles, the USD has peaked around the first interest hike. That suggests that statistically speaking the direction of USD is almost inversely correlated to the Fed interest rate cycles. The explanation of this phenomenon is simple and it is based on the fact that markets tend to anticipate any fundamental fact that is highly probable to occur before it actually occurs.

But keep in mind that statistics don’t tell the whole truth, and thus, we can’t be sure that we are not going to see EURUSD hitting parity (1:1) or even to trade below 0.9 during 2016-2017. In other words, a final major EURUSD downtrend before the long-term turnaround commences is not out of the question. As concerns timing, historically the USD bear markets of 9-10 years are followed by USD bull markets of 6-7 years. According to that perspective, we may witness 2 additional years of a USD upswing.

 

Here is the 2016-2020 G10 Forex forecast by Deutsche Bank (Datastream):

USDX Technical Analysis

The US Dollar Index (USDX) trades within 2 main channels (A,B). The A Channel (A1:A2) provides support at about 96.00 points and resistance at about 99.70 points. The later-formed B Channel (B1:B2) provides support at about 98.0 points and resistance at about 101.90.

TCI on the US Dollar Index

The Trading Center Indicator (TCI) is a unique Technical Analysis Indicator developed by TradingCenter. Here are the TCI Indications regarding the US Dollar Index (press slider).

 

■ Forex Market Report for 2016 and USDX

Giorgos Protonotarios, Financial Analyst for TradingCenter (January, 4th 2016)