US Dollar Forecast: FOMC Minutes Confirm Fed’s Hawkish Lean for December

US Dollar Index, FOMC Minutes Key Points

• The FOMC minutes confirm that the outlook for a third consecutive 25bps interest rate cut in December is likely to be substantially more divisive.
• Fed Funds futures traders are pricing in only a 1-in-3 chance of a rate cut next month, down sharply from the 90%+ implied odds at this time last month.
• The US Dollar Index (DXY) is threatening to break out from its 3-month cup-and-handle pattern at 100.25 – what are the next levels to watch?

The FOMC minutes are out, and as expected, they confirm the primary takeaway from the meeting three weeks ago: The central bank was broadly in agreement about the need to cut interest rates last month, but the outlook for a third consecutive 25bps interest rate cut in December is likely to be substantially more divisive.

In fact, the interest rate-related headlines from the minutes suggest that no change to interest rates should be the odds-on favorite:

• SEVERAL PARTICIPANTS WERE AGAINST [THE OCTOBER] RATE CUT
• 'SEVERAL' SAID DECEMBER CUT 'COULD WELL BE' APPROPRIATE
• 'MANY' SAW DECEMBER RATE CUT AS LIKELY NOT APPROPRIATE
• FURTHER POLICY RATE REDUCTIONS COULD ADD TO THE RISK OF HIGHER INFLATION BECOMING ENTRENCHED

Clearly the central bankers were leaning toward leaving interest rates unchanged in December three weeks ago, and with today’s news that the BLS would never release the October NFP report, and that the November NFP reading will not be released until after the December FOMC meeting, Fed members will have little in the way of top-tier economic data that could change neutral leans.

Beyond tomorrow’s delayed/dated NFP release from September, the only other high-quality government readings on the Fed’s dual mandate will be the Core PCE inflation report next week (again delayed data from September) and the October CPI, which will be released on the same day of the FOMC decision on December 10^th. Unless those readings show a dramatic drop off in price pressures, it appears that the Fed is likely to leave rates unchanged, a view that traders are increasingly coming around on.

According to the CME’s FedWatch tool, Fed Funds futures traders are pricing in only a 1-in-3 chance of a rate cut next month, down sharply from the 90%+ implied odds at this time last month:

Source: CME FedWatch

US Dollar Technical Analysis: DXY Daily Chart

 

Source: StoneX, TradingView

As the chart above shows, the US Dollar Index (DXY) has been quietly but steadily grinding higher since bottoming near previous support at 96.40 back in mid-September, helped along by fading expectations for a December rate cut.

In the wake of the FOMC minutes, the currency is testing the top of its 6-month range near 100.25, with a break above that level confirming a potential double bottom formation at 96.40 and setting the stage for a continuation toward the 101.00 level or the 38.2% Fibonacci retracement of the Q1 drop near 101.50 next. Readers could also view the setup as a 3-month cup-and-handle formation, with similarly bullish connotations if we see a confirmed breakout.

Even a period of consolidation below resistance would keep the bullish bias intact at this point, with only a move below last week’s low, and the rising 50-day EMA, near 99.00 flipping the bias back to neutral.

-- Written by Matt Weller, Global Head of Research

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