Will the USD uptrend carry over into the New Year

It’s been an absolute whirlwind of a week for traders of all stripes, but volatility appears (knock on wood) set to die down as we head into the traditionally slow last two weeks of the year. Of course, the biggest development was the Fed’s historic decision to raise interest rates for the first time in nearly a decade, a decision which has impacted all markets, but perhaps none more than the US dollar.

While everyone had already anticipated that the central bank would raise rates, the secondary components of the announcement, including the optimistic outlook in the accompanying economic projections and Fed Chair Yellen’s press conference, were more hawkish than many expected. Though we’re skeptical that the Federal Reserve will follow through on the “dot chart’s” plan to hike rates four times next year, the fact that the Fed hasn’t blinked yet has pushed the greenback higher.

Looking at the weekly chart of the US dollar index, which measures the performance of the buck against six of its major rivals, reveals a similarly constructive long-term outlook. After consolidating within a bullish flag / high base-type pattern for the first three quarters of the year, the index saw a bullish breakout in October and went on to test its 12-year high near the psychologically-significant 100 level. The European Central Bank’s half-hearted easing measures pushed the index down off that level (note that the euro represents nearly 58% of the dollar index), but with the Fed’s continued optimism, the greenback is getting its groove back once again.

The secondary indicators are generally supportive of further gains, with the weekly MACD trending higher above its signal line and the “0” level and the RSI consistently finding support above the 40 level, signaling a healthy uptrend. As we noted above, we may not see any much movement whatsoever for the rest of the year as traders focus more on the holidays than the markets, but a confirmed break above the century mark at 100.00 could mark the start of another leg higher toward 102.00 or 104.00 early in 2016. This bullish view will remain intact as long as the dollar index holds above its 40-week (200-day) moving average, currently around 97.00.

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