Fed Decision in Focus: Dollar Index at a Turning Point as Markets Brace for Powell

1 month ago 185 views 4 min read

Grega Horvat

Analyst

Forex Analytix

Fed Decision in Focus: Dollar Index at a Turning Point as Markets Brace for Powell

Dear Traders and FA Members,

Unfortunately, I won’t be able to join today’s live FACE webinar, but because of the importance of the Fed decision later today, I felt it was necessary to share a quick update here in this blog post.

If you have been following our recent webinars with Dale, you know that I have been highlighting a wedge formation on DXY that developed from the September lows. In Elliott Wave terms, this wedge can represent either an ending diagonal of an A-B-C correction or even a leading diagonal of a new bullish trend. What matters is that in both scenarios, I was looking for a reversal from above the 100 area on the Dollar Index — and now we can see that the wedge has been broken, which signals more weakness ahead.

However, this weakness may not unfold in a straight line. Today’s Fed decision will be crucial, and Powell’s commentary during the press conference may be even more important. If there is uncertainty about what the Fed plans to do in upcoming meetings, the dollar could experience a recovery. Also keep in mind that markets are pricing in a roughly 90% chance of a rate cut, which means a lot of dovish expectations are already priced in. The Dollar Index dropped more than 1.6% from the latest swing high, while the S&P 500 rallied more than 5%. So some stabilization in the dollar and current pause on stocks, is not a surprise.

Looking at the wave structure, the recent sell-off on the dollar was impulsive. If Powell is not as dovish as expected, we could see a rally on the Dollar Index, potentially towards the 99.56–99.80 resistance area, before another sell-off later on — ideally into wave three. I believe there is still room for a move towards the October 3rd lows where we also have an unfilled gap.

Stocks also made an impressive rebound from the November lows after filling the October 10th gap, and the break above both trend-line resistances supports the bullish view. But ahead of the Fed event, the market is moving sideways, which could simply be a consolidation. If Powell fails to convince markets that further cuts are coming soon, we could see some weakness — possibly a drop toward the 6792 support on the S&P 500, which I believe would represent a very attractive buy zone. Deeper supports remain at 6700 and then 6678.

Now, if you looking for some trade setups and you will keep an eye on these levels I talked above, I suggests to be patient and rather act on Thursday or Friday when the dust and speculation for next FED move will settle a bit.