The US dollar was demonstrating an incredible performance recently, rallying to multi-year highs against many of its most-traded peers. Yet the rally stalled as of now, making traders question what the future holds for the currency.
The major event for the dollar (and the whole Forex market) this week will be the policy meeting of the Federal Open Market Committee. The event is important not only because it will be the last policy decision this year but also because it will be accompanied by a press-conference and economic projections. It will be interesting to see Federal Reserveâs forecasts, particularly in regard to interest rates. Market participants will also be carefully studying the policy statement, watching to any change of a language. In particular, analysts will eye the mention of keeping interest rates low âfor a considerable time.â Some policy makers were arguing in favor of dropping this phrase, and if the wording would not be present in the statement then speculators will consider it as a sign of a close interest rate hike. Some economists think that the Fed will hike rates in June if the phrase would indeed be dropped.
In general, market experts are counting on the FOMC to be hawkish, helping the dollar. Macroeconomic indicators were mostly supportive of such view, showing robust economic growth in the United States. Not everything is nice and shiny though as there were some rather disturbing reports. As an example, the New York manufacturing index demonstrated the first negative reading in almost two years. The FOMC mentioned that its policy decisions are data-dependent, and with data being not completely positive, policy makers may decide to postpone monetary tightening.
As usual, it is recommended for traders to exercise caution ahead of any major event. It is not only hard to predict what exactly will occur but also how the market will react to it. As a result, DailyFX is neutral on the dollar. Forex Crunch is also neutral on the dollar-euro currency pair but bullish on other dollar-crosses.
Looking away from the FOMC meeting and on the longer-term picture, fundamentals look bullish for the US currency. The market sentiment is averse to risk, making the greenback attractive as a haven currency. The dollar should be especially strong against commodity-related currencies due to the slump of prices for raw materials, led by crude oil. At the same time, it is not impossible for the currency to stay in a corrective mode till the end of the year considering how much strength it has spent in the recent impressive rally that has lasted for many months.
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