Fed Rate Decision: Buy the Dollar on the Dips

Lior Alkalay - INO.com Contributor - Forex

The Fed rate decision is approaching quickly. Will the Fed choose to ignore the headline inflation figure and China's woes and decide to press on with a rate hike this month? No one really knows what they'll decide. One might conclude then, that if the Fed rate decision is a guessing game, so is the Dollar, right? Wrong! In fact, the Fed rate decision could be one of the best times to pile on to the Dollar and buy it cheap.

Fed Rate Hike Not Priced In

With all that talk of a Fed rate hike it might seem that a Fed rate hike is now priced in. But that's not the case. As the data from the CME Fed Fund futures prices, the market sees only a 25% chance for the Fed to raise rates this September. And that could explain why the Dollar Index took a dip over the past weeks.

CME Group FEDWatch

But here's where it gets really interesting. When we move forward on the calendar and examine the probability of a rate hike by December, the likelihood jumps to 59%. If we continue to move on into March 2016, that probability jumps to 77%. That means markets are almost certain that the Fed will raise rates at least once in the coming two quarters.

Fed Rate Hike Implied Probabilty

The China Boost

Even as the markets are almost certain that a rate hike is coming, brewing troubles in China fail to diminish. It's as though the Forex market is awakening from its dream of turning the Yuan into an alternative to the Dollar. That, in fact, is a major long-term factor in the Dollar’s bullish bias. China's government, despite what it proclaims, will be forced to weaken the Yuan even further. And that means that even if the Fed delays, the pressure to buy the Dollar is not expected to fade.

So, Why Buy the Dips?

The logic is simple. A Fed rate hike is only a matter of time even as other regions are in the midst of an easing cycle. That means that every Dollar decline should be used to buy it cheap and ride it higher. And if we focus on events this week, the decision becomes rather simple. At the moment, the Dollar index has already taken a dip and that means that no rate hike is priced. Now, if the Fed doesn’t raise rates this time the Dollar might plunge. However, that only means that the Fed might raise rates the next time or sometime within the next two quarters. Of course, that means the Dollar is still long term bullish.

Down to Targets

Now, of course, it's time to get down to practice. We outlaid the Dollar's outlook from 20,000 feet, now it's time to pin down the next target. As can be seen in the chart below, the pair retraced exactly in accordance to the Fibonacci expansion lines. If you're familiar with the Fibonacci replacement you'll know that that tool is designed to predict corrections. The Fibonacci expansion is designed to predict the next expansion of a bullish trend. The Fibonacci line clearly marks the 102 as our next expansion zone. With the DXY (Dollar Index) currently trading at 93, that means roughly 10% upside for the next target.

Dollar Index Futures (DXY)

Look for my post next week.

Lior Alkalay
INO.com Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

One thought on “Fed Rate Decision: Buy the Dollar on the Dips

  1. I'm not trying to be contrarian, but isn't the US Dollar index, more likely to revert back to the mean of 76-82 as opposed to making new highs? (It's currently the highest it's been since 2002 when it hit 120 and 1985 when it hit 165)

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