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- U.S. Dollar at key medium-term inflection point

- Fed meeting could prove the catalyst for new move

- Charts showing ‘technical inflection’ points as well

There may be more at stake for the U.S. Dollar at today’s Federal Reserve meeting than meets the eye, says Richard Perry, an analyst at Hantec Markets.

Perry sees the U.S. Dollar reaching a key ‘fork in the road’ moment, suggesting the Fed meeting could mark an important turning point for the Dollar in terms of its medium-term trajectory.

“There is a sense that major markets could be at near to medium term inflection point,” says Perry who uses both fundamental and technical analysis for his forecasts.

The U.S. currency has regrouped after an overall very weak October in which it has fallen to almost all its major counterparts bar the safe-haven Yen, which itself has weakened more on an improving global trade outlook.

But Perry questions whether this short-term bounce is enough to turn things around for the greenback, and cautions Dollar-bulls against getting too over-excited that it is.

“Are these just retracements in what looked to be a more dollar negative outlook, or is the dollar about to get a new lease of life? It is over to Jerome Powell,” says Perry, referring to the governor of the Fed, who will deliver a critical speech after the Fed’s meeting at 19.00 BST today.

Whilst investors are almost unanimous in expecting the Fed to deliver a 0.25% cut to the 2.0% base lending rate so as to provide an ‘insurance’ cut for the economy against the potential for future weakness, analysts are more divided about the future outlook, and it is on this subject the Dollar could see movement.

The main argument is whether the expected October cut will be a ‘one and done’ or part of a longer-easing cycle in which there will be more cuts down the road.

“Since the Fed cut rates for the first time back in July, traders have pondered over whether these were just mid-cycle adjustment “insurance” cuts or part of some greater easing cycle. How Fed chair Powell delivers the message today could be crucial for the medium-term dollar outlook,” says Perry.

The current implied odds of another rate cut in December, for example, are only about 15% but if Powell is optimistic about the outlook for the economy they could fall even lower - and vice versa if he is pessimistic, says Matt Weller, an analyst at Forex.com.

This is likely to have major implications for the U.S. Dollar which is ultra-sensitive to interest rates. More rate cuts would be negative for the U.S. Dollar as they would reduce the currency’s attractiveness to foreign investors, lowering net foreign capital inflows.

How the chairman of the Fed talks about the current emergency asset purchase programme which has been used to pump liquidity into short-term lending markets, could also be key. If he says the programme needs to run longer and get more ambitious it could hit the Dollar hard since greater liquidity will dilute its value.

“After the recent turmoil in the short-term funding market, traders will be keen for an update on the stability of this critical function of the financial system. If Powell indicates the program could expand from here or expresses pessimism about any other aspect of the economy, the US dollar could retrace last week’s gains and stock indices could surge further into record territory on the potential for further monetary support into the end of the year,” says Weller.

One positive from the Fed’s perspective is the improved rhetoric around U.S.-China trade relations and the apparent close proximity of the Phase 1 trade deal being signed.

Yet from the Dollar’s perspective, trade is a lose-lose driver. So far the improved relations have been negative for the Dollar because of reduced Dollar safe-haven demand.

If the trade dispute worsens, however, it could also be negative for the greenback from an economic standpoint as it will probably exacerbate the decline in manufacturing.

U.S. Consumer confidence undershot expectations in October and showed a decline from the previous month and there is a risk this could concern the Fed and make them extra cautious.

The decline in confidence suggests the possibility of contagion from the slow-down in heavy industry to the so-far resilient consumer - something which would be of grave concern to policymakers.

Dollar-pair charts are also showing interesting ‘inflection points’, according to Perry.

The “EUR/USD has drifted into $1.1060/$1.1100 support,” says Perry, raising the question of whether this temporary correction will find a floor from which it can rebound - leading to another bout of Dollar weakness.

It looks like the pair is pausing in a new uptrend whilst at the same time, the downside pressure on the trendline suggests the risk of a break lower evolving in the event of USD strength. This reinforces the idea of the greenback reaching a critical crossroads.

GBP/USD has also paused after a strong uptrend in October on improved Brexit sentiment. The big question here is can the Pound hold on to its gains versus the U.S. Dollar or is it curtains for the Sterling-rally?

The rather shallow retracement of the rally so far suggests more upside is on the cards, but the next few days could be crucial on determining the Dollar’s contribution.

Finally, USD/JPY’s chart also looks ‘tense’ as the pair bumps up against resistance from an overhead historic resistance level at 109.00.

The big question here is whether U.S. Dollar bulls will find the heart to push the exchange range above 109.00 and break the ceiling which has kept the exchange rate pent in for so long?

Again, according to Perry, anyway tonights FOMC and the next few days may be key.

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