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

Our Previous Forex Trading Signal

In our previous trading signal (November 2015), we said December would be a good month for the EUR against the USD. In fact, EURUSD reached 1.05 in early December 2015 before making a strong move up to 1.1059. After the Fed raised rates in mid-December, EURUSD stayed between 1.07 and 1.098.

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Fed Rates Hike – What Happens Next

In December, the Fed raised US interest rates by a quarter, ending a long period of near-zero borrowing costs. This decision affects many areas of finance, including Forex markets, USD exchange rates, bond markets, stock markets, and commodities. Remember, the price of every financial instrument competes with the risk-free returns from interest rates.

Forecasting Upcoming Rate Hikes Based on CME Futures

USD rates are expected to rise by 1.50-0.75% over the next two years. According to CME Group 30-Day Fed Fund futures prices, there is a 50.3% chance of a 0.25% rate increase in March 2016. The pace of Fed tightening might speed up in the second half of 2016. Overall, the median forecast suggests the Fed will raise rates by 0.50-0.75% in 2016 and another 1.00% in 2017.

The Impact on the US Dollar and EURUSD

In many TradingCenter Forex reports over the past 15 months, we said 2015 would be the year of the US Dollar. Indeed, 2015 was an exceptional year for the USD. But will 2016 be as good for the USD?

In four of the last five Fed rate hike cycles, the USD peaked around the first hike. This suggests that the USD tends to move opposite to Fed rate cycles. The reason is that markets often anticipate expected events before they happen.

However, keep in mind that statistics don’t tell the whole story. We cannot rule out EURUSD hitting parity (1:1) or even dropping below 0.9 in 2016-2017. In other words, a major EURUSD downtrend before a long-term turnaround is possible. Historically, USD bear markets lasting 9-10 years are followed by USD bull markets of 6-7 years. From this view, we may see two more years of a USD rise.

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

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USDX Technical Analysis

The US Dollar Index (USDX) is trading within two main channels (A and B). Channel A (A1:A2) offers support around 96.00 points and resistance near 99.70 points. The newer Channel B (B1:B2) provides support around 98.00 points and resistance close to 101.90 points.

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TCI on the US Dollar Index

 

■ Forex Market Report for 2016 and USDX

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