Dollar Hollar: Trading Levels Post FOMC Decision

Dollar Hollar: 81.4% Chance Of A Move Today

2015-12-16 10_01_36-Countdown to FOMC - CME Group

The CME Implied Probabilities of a rate move has rised to 81.4% hours before the release of the FOMC  statement and the subsequent press conference by FED Chair Yellen. If the FOMC delivers as the markets hotly believes I expect the USD bull market to make another leg higher driven by the FED  finally delivering on the first rate move in nine years.

Near term, Monetary policy divergence is supporting the USD and I also see the dollar as a hedge on unclear communication. Any closing of the gap between the Fed dots and market rate expectations is likely to be USD positive. However, I struggle to see more than a small dollar rally. In the past five cycles, the first Fed rate hike saw the trade-weighted USD Index peak, and the dollar is already up 40% in trade-weighted terms, the same magnitude as seen in the entirety of the last bull market.

Fundamental Flows

With much of the implications of the fundamental considerations reviewed in recent reports and my colleague @LFXJames providing an excellent preview of today’s meeting. Today I want to focus on the technical trade set ups I am tracking in the USD Index. Today we will cover the the bullish and bearish scenarios for the price action post the FOMC decision.

Caveat Emptor

Firstly a word of caution. It is of paramount importance that if you are looking to trade around the FOMC rate decision, that you size your positions to reflect the associated risk. If the FOMC fail to move today, to my mind, this scenario creates the greatest potential for market dislocation. With 81% of the market positioned for a move, the bus is pretty loaded in one direction. So if the FED don’t deliver this would leave the greatest proportion of market participants needing to adjust their views and more importantly their positions, as always most will act first and think later, this panic will create a near term liquidity squeeze that could create very erratic and exaggerated price action in both directions.

Under this scenario I counsel standing aside and watching for swings to play out in both directions, more often than not, the third swing in this situation tends to be the directional move, once weak stops are wiped out on the long and short side. This scenario could be more sizable than usual due to the fact that a lot of major participants have closed their books on their trading year, and will not take major positions until January, so some of the normal larger liquidity providers wont be present in the market to provide the normal price action safety nets. So once again I stress size your trades accordingly!

Technical TakeAways

Three charts tell the tale of the technical tape so far and to be honest price action is mapping my proffered probable path very well.
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Trading TakeAways

The price action has developed as proposed and the platform posited to develop for the final push higher has manifested as anticipated into the FOMC meeting.So now we have a decent perspective on where we are and how we arrived here technically speaking, lets look at where the future trade locations may develop.

Bullish Scenario

The Bullish scenario is an extension of the current price action and further mapping of the probable path of price as highlighted in the charts above and this would be my favored scenario, being long against 97.00 is the trade I recommended in recent reports and is playing out near perfectly. If the FED deliver I anticipate a push higher to test a minimum upside objective of 103.00/104.00 it is from this area I will be monitoring intraday reversal patterns to venture short for a move to retest the apex of this years consolidation zone at .9500 as per the chart below. Remember probabilities suggest thrusts from prolonged consolidation prove terminal in the near term as too many market participants chase price action at poor locations. I am not suggesting a termination of the trend but more that this structure would provide a better trend entry after a shake out of poorly positioned players.

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Bearish Scenario

These trading levels are a little more trickier to map for many of the reasons I discuss above. However, lets look at some of the key support zones I would anticipate we test should the FED once again fail to feed market expectations. The best way to map the potential levels we test on a market disappointment and rapid position adjustment is to look back at the last time this type of scenario developed in the market.

If we look back to March this year, we see the scale of move we can expect under such circumstances. I would expect a swift retest of this years range support zone at 92.50 from here I would expect some support to emerge and a retest of the range apex 95.50 from below, where I would watch for intraday reversal patterns to venture short for a retest and break of range lows into January.

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So now let the games commence so to speak, I once again urge you to take heed of my comments regarding position sizing this evening and tomorrow. If you have already had a great year better to watch this one from the sidelines with an early mince pie and glass of something festive!
For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick
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