Fed rate decision: trading the trend trend away from USD

[MongiIG]

While US inflation came in weaker than expected, the US Federal Reserve is still forecast to raise rates by 50bps today. We look at how to trade the trend away from the dollar.

 Jeremy Naylor | Writer, London | Publication date: Wednesday 14 December 2022

Easing US CPI

So much of the market move has been as a result of Tuesday's US consumer price inflation (CPI) easing more than expected in November to its lowest level in almost a year, giving the Federal Reserve (Fed) more room to move around. It plans to begin slowing the pace of interest rates.

Let's take a look at the numbers. The rate of increase in the consumer price index in the States fell to 7.1% last month, lower than 7.3% forecast by economists and down from 7.7% in the month of October. It is the lowest level since December 2021.

Now, overall CPI rose 0.1% from the previous month, less than the 0.4% increase in the month of October.

US dollar basket

I want to show you what's happening with the dollar basket in all this falling yesterday to levels not seen in this market since June 2022.

But today it's now about the US interest rate decision. Markets have been pricing a 50 basis point rise. Clearly voting members of the Federal Reserve have to tread carefully. The more tightening there is to come, the deeper and deeper the expected recession will be.

In any event the Fed is expected to dial back from the speed at which has been raising rates the last four times it's met. Its taken rates up 75 basis points on each occasion.

Trading the dollar weakness

So how do you trade this dollar weakness? Well the way to do it will be through the euro/dollar trade and in the last hour or so it's punched above this line of resistance that we saw established back on the 27th of June at 10616.

And indeed we've got an entire candle above that there at the moment. Only a small move in today's session but I think that potentially could be significant. Highest levels we've seen for the euro against that now weaker dollar since the 9th of June 2022.

The next line to watch out for if you're long on this would be the highest we had back in May 2022 at 10787. Up here, that would be your price target if you're long on this. If you're long, your stock goes below the underside of yesterday's candle, around the 105 level.

10626 is where we're trading there at the moment for the euro/dollar trade.