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Dollar Remains Lower as Fed Time Nears

James Hyerczyk from ForexHound.com at 12/16/09


The U.S. Dollar is still trading on the weak side at the mid-session as traders await the Fed’s monetary policy decision.

The Fed is expected to leave its benchmark interest rate at 0.25%; the argument is whether it will alter the language its policy statement to represent positive changes in the U.S. economy.

Bullish Dollar traders are looking for the Fed to lean more toward the hawkish side. These traders have increased bets the last few days that the Fed would soften the language of its last monetary policy statement. These changes would include altering or removing the Fed’s stance to keep interest rates low for “an extended period”.

From a trader’s perspective, the Fed will have to substantially alter the language of its statement since a simple softening of a few phrases has already been priced into the market. In addition, traders are likely to sell the Dollar if the Fed leaves the current language intact or if it surprisingly becomes more dovish. Based on these scenarios, the Dollar is likely to feel pressure following the release of the statement. Today’s announcement could become a simple case of “Buy the Rumor, Sell the Fact”.

A break in the Dollar after the Fed news should be treated as a profit-taking correction and not the start of another change in trend. Now that the main trend has turned up, traders should look for a buying opportunity on the next substantial pullback.

The EUR USD is trading better at the mid-session. Traders are lightening up short positions ahead of the Fed’s statement and reacting positively to good Euro Zone purchasing manger’s indexes on manufacturing and services. For the second day in a row, the Euro is holding a .618 retracement level at 1.4465.

An unexpectedly better U.K. jobless claims report is helping to give the GBP USD a boost at the mid-session. This was the first decline since 2008. The British Pound held inside a retracement zone at 1.6292 to 1.6254 the past 4 days while trying to establish a support base. Breaking out to the upside could trigger a rally to 1.6443 to 1.6508.

The USD JPY is trading a little better after a soft opening. Today’s upside target is 90.07. The chart indicates room to the downside with 88.08 a potential target.

The USD CHF is trading under pressure while giving back some of yesterday’s gains. Watch for a possible pullback to the old main top at 1.0337. A failure to hold a correction back to this price indicates further downside pressure. The chart indicates this market is vulnerable to a correction back to 1.0173.

The Canadian Dollar is managing to hold on to a small gain versus the U.S. Dollar. The USD CAD remains inside of a main range at 1.0691 to 1.0459. A minor range at 1.0598 to 1.0537 is also attracting attention.

The AUD USD is weakening as traders are reacting negatively to the news that the economy grew in the 3rd quarter at a slower pace and below market expectations. This decline in growth could be a reaction from higher interest rates. The Reserve Bank of Australia saw this coming. This is why it decided to take a pause in any further interest rate hikes over the short-run.

The weaker Australian Dollar is putting pressure in the NZD USD at the mid-session. This currency pair, however, is finding support in a retracement zone at .7180 to .7148. Bullish traders continue to support this market on dips following last week’s hawkish comments from the Reserve Bank of New Zealand.

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