Prospects of interest rate hike based on Dollar Index chart
Some observations for Dollar Index chart in the weekly time frame. It is my personal opinion that prospects for additional rate hikes for 2017 are not high based on the way DXY is declining below previous rate hike levels.
When it comes to any discussion on the USD or Dollar Index, sooner or later some kind of comment like the US Federal Reserve will raise rates because the Fed said so will come up. As a result, many individuals give a little more bullish bias to the USD. I think thats fine but this bullishness does get in the way sometimes because individuals stay bullish even when the chart clearly shows a down trend.
I wonder if the Federal Reserve is a reliable indicator.
After all, Chairman Yellen did assure the market that the Fed will raise rates since 2014 but the first rate hike came in December 2015. Additionally she provided guidance to expect 4 rate hikes in 2016 which got cut down to 2 and then finally only one hike was done in December 2016.
Definitely the Fed has to exercise judgement based on economic performance as the data comes in. I don’t think there is a rulebook with one-size-fits-all solution for this kind of policy making.
I am not qualified to judge but for traders concerned, I wonder if a better way to approach the market is to look at facts available rather than to rely on what the Fed says.
DXY weekly chart, visual evidence
Statements of fact
- Major levels for 2015 – late 2016 was 92 – 93 (support) and 100 (resistance).
- 3 red flags indicate rate hikes; rate hikes when DXY was above 98.
- Highest DXY was 103.80 following the second rate hike.
- DXY is back below 100.
- DXY is negative YTD.
- Quarter to quarter, month to month, week to week trend for DXY is down.
- I believe traders can use the DXY as an indicator of future rate hikes (prospects).
- DXY goes up if the market believes that interest rates will hike further. The last three rate hikes as a guide, there is a good chance for a rate hike when DXY is above 98.
- This belief may be described in two ways: 1) the economic conditions for a rate hike will appear when DXY is above 98, the Fed will hike rates when DXY is above 98 Or 2) when the market believes that the Fed will hike rates, they push up the USD in anticipation (so prospects of a rate hike is very strong when DXY > 98).
- Since DXY is lower than the previous 3 rate hike instances, the prospects of a rate hike in June are not very high. There are 3 more weeks to go until the June FOMC meeting from 13-14 June so anything can happen but one has to rely on a nearer reading.
- If DXY is not merely doing a retracement/correction, is it possible that there are no more rate hikes coming? I think that the lower DXY goes, the lower chances of a rate hike regardless of what the Fed says. Recall how I framed this belief? If DXY goes lower than 98, either 1) economic conditions for the Fed to act on a rate hike no longer exists or 2) markets are selling the USD since they no longer anticipate further hikes.
- It is logical to expect DXY 100 to act as resistance. Until this level is penetrated again, we are unlikely to see DXY at 103 or any higher level.
- That blue horizontal dashed line indicates what I call buyer’s remorse. DXY was printing this level/zone the week Trump was elected US President. Maybe it is merely a coincidence, maybe it was his election that prompted DXY to move up strongly but whatever the reason is, DXY is now back to square one. Not the man’s fault but whatever good feeling for the DXY since that week appears to have disappeared.
- Coming back to the prospects of a rate hike, if there was only one rate hike in 2015 when DXY was printing 92 – 100, is it logical to believe that there are no more rate hikes for the rest of 2017 since one was already done in March?
- Finally I believe that when DXY firmly trades below 92, it is a signal that markets no longer believe in any hike at all.