Will the US Dollar Surge Higher after FOMC Meeting?

The US Dollar Index (UUP) continued its ascent against the other major currencies as investors positioned for a rate hike from the Fed and reacted to the increased possibility of tax reforms by the end of this year. For the week ending December 8, the US dollar index closed at 93.8 as compared to 92.8 in the previous week, appreciating by 1.1%.

As per the latest commitment of traders (or COT) report, released on December 8 by the Chicago Futures Trading Commission (or CFTC), large speculators and traders turned marginally bullish on the US dollar through Tuesday, December 5. Increased chances for tax reforms and the lack of any positive surprises from other major currencies led to increased demand for the US dollar. Another cyclical factor that could impact long US dollar positions is the repatriation of cash into the economy before the end of the year.

As per Reuters’ calculations, the US dollar (USDU) net short positions rose to -$4.3 billion as compared to -$3.9 billion in the previous week. This amount is a combination of US dollar contracts against the combined contracts of the euro (FXE), British pound (FXB), Japanese yen (FXY), Australian dollar (FXA), Canadian dollar (FXC), and the Swiss franc.

For the US dollar, the most important event this week is the FOMC meeting on Tuesday and Wednesday. It is widely expected that the US FOMC will increase the interest rates by 0.25%, so the focus will likely be on the updated dot plot. The dot plot represents the expectations of the FOMC members with respect to future rate hikes. The dot plot update could signal three more hikes in 2018 and another three hikes in 2019. Such a hawkish tone/dot plot could drive the US dollar higher against other currencies.

In the next part of this series, we will discuss how bond market investors could react to the FOMC meeting.