The last week before holidays has potential to become crucial in determining the dollar’s performance in the near future. The policy meeting of the Federal Reserve will be the highlight of the week, but important economic reports scheduled for release on Friday can also affect the currency.
The past week was extremely positive for the US dollar due to risk aversion caused by signs of slowing global growth. Furthermore, the US Dollar Index started the current week at 97.44, near the 19-month high of 97.71 it hit on Friday. With few important releases ahead of the Fed meeting, the greenback will likely continue to react to the general market sentiment. Starting on Wednesday, when the Fed will announce its decision, the currency market is going to experience extreme volatility.
The market has priced in an interest rate hike from the Fed, and CME FedWatch shows a solid 75% chance of such an event. Unless the US central bank provides a surprise, traders will focus their attention on the economic projections released alongside the policy announcement. Specifically, market participants will watch for Fed’s dot plot, which suggests how many hikes US policy makers are planning to make in the future. Previously, the central bank was predicting three more hikes beyond the one expected this week. But the recent macroeconomic releases and dovish stance of some Fed members, including Chairman Jerome Powell, cast doubt on such outlook. Now, analysts have widely different views on how many hikes the Fed can perform in 2019. While most are divided between one or two, some expect no hikes at all, and few retained the outlook for three hikes. All that means that the Fed projections will be closely watched and will have a crucial impact on the dollar.
Beyond the Fed, Friday will be full with economic releases, most important of them being gross domestic product and the PCE price index. The Fed pays attention to PCE inflation, but this week’s release will be unable to affect Fed’s decision because it will happen after the meeting. Nevertheless, it can influence future decisions in the coming months. Economists estimated ahead of the release that inflation accelerated from 0.1% in October to 0.2% in November. As for GDP, experts predicted that the final estimate will show the same 3.5% growth in the third quarter of 2018 as in the preliminary reading.
Despite the uncertainty associated with the Fed announcement, market analysts were largely bullish on the dollar. Forex Crunch issued bullish forecast for the dollar against all other major currencies with the exception of the Japanese yen. DailyFX was also bullish on the greenback, arguing that markets misinterpreted signals sent by Fed officials and three interest rate hikes next year are still in the cards.
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