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    How to Trade the Certainty of a Fed Rate Hike

    On Wednesday the 16th of December, it is a near certainty that the US Federal Reserve will raise interest rates for the first time in over 9 years. The economy is certainly adding jobs, which is in turn giving Janet Yellen, the Fed chairwoman, the confidence to tighten monetary policy.

    This is the finale of economic events for the year and will be the last chance for big market moves until 2016. Traders are now seeing a 70% chance of a rate hike, and this sentiment can be clearly seen in the trajectory of the US Dollar, which has been on an uptrend since 2014.

    In fact, the majority of the break higher in the US Dollar already took place in 2014; this year gains have mostly been consolidating. And currently, the Dollar has begun coming down even with a certain rate hike looming. Why is this?

    US Dollar Index Monthly Chart
    Source: Tradingview.com

    Buy the Rumor, Sell the Fact

    The old market saying of "buy the rumour, sell the fact" is clearly evident in this monthly chart of the US Dollar Index, which is a basket of curencies consisting mostly of Euro. Key events like these largely do not play out at the time of the event. Instead, the market prices in the event gradually over time, and in the case of the US Dollar, the market has priced in a rate hike and is currently long US Dollars at record levels.

    This is probably why the Dollar is having a hard time right now and falling the face of a certain rate hike. Next Wednesday, it's unlikely that we see more gains after a rate hike to 0.50%. After the event takes place, we will likely see more volatility and eventually a lower Dollar (and therefore higher EUR/USD and lower USD/JPY.)

    Some time after the Fed decision, and after a pullback in the US Dollar, there should be another upward move. But the market will begin focusing on something else entirely from then on; after all everyone knew that rates would rise. The question traders will be asking later is how fast and how often will the Federal Reseve continue hiking rates past 0.5%, and will it be an effective policy against inflation?

    Given those questions, it may be unlikely that new US Dollar Index highs won't move significantly beyond the 100 level. And that would mean the the Euro wouldn't see a sustained break under 1.05.

    The information provided is for educational purposes only and should not be considered as investment advice.

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