The Dollar extended gains against a basket of major currencies on Tuesday ahead of today’s highly anticipated FOMC meeting minutes release. This latest rebound from three-year lows suggests that investors are inclined to overlook concerns around the U.S budget deficit — for the moment, at least.
There were no major announcements or changes following last month’s Fed meeting, so it seems unlikely that the release of January’s meeting notes will spark a significant reaction from the currency markets. Most will be hoping for insight into planned interest rate hikes for 2018 and, with many commentators citing a March hike as likely, investors will be dissecting the minutes for clues as to whether the central bank will come out dovish or hawkish in Yellen’s wake. The Fed’s stance on inflation, tax cuts, and infrastructure spending will also be under scrutiny.
Mounting speculation surrounding Fed rate hikes could pave the way for further upside, but gains could just as easily be limited by other key fundamental drivers. Bulls may be encouraged by optimism over the US economy, rising inflation and rate hike expectations, while Bears will likely cite ongoing political risk in Washington, a widening US fiscal deficit, and the prospect of interest rate hikes from foreign central banks as reason enough to view the greenback with caution.
But, for the moment, bulls appear to have the upper hand, and a hawkish tone in today’s notes will likely see the Dollar strengthen further. Could the Dollar’s recovery be the start of a bull rally or just an empty technical bounce? Time will tell.
Taking a look at the technical picture, the Dollar Index remains pressure on the daily charts. A failure of prices to keep above 89.50 could encourage a decline towards 89.00. Alternatively, a breakout above 90.00 may pave a path to further upside.
Commodity Spotlight on Gold
An appreciating Dollar has weakened Gold considerably this week, with prices sinking towards $1324.15. It seems that the prospect of higher US interest rates is having an impact on the zero-yielding metal, which may be at risk of sinking still lower if FOMC hawks make an appearance later today.
Focusing on the technical picture, the yellow metal is coming under increasing selling pressure on the daily charts. Sustained weakness below $1340 could encourage a decline lower towards $1324.15, while a scenario where bulls are able to maintain control above $1340 may invite an incline higher towards $1360.