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Fed Rate Hikes Could Spur A Renewed U.S. Dollar Rally

From Boris Schlossberg: What does the market know that Janet Yellen doesn’t? That seems to be the question that is occupying currencies for the second week in a row as the dollar simply can’t muster the momentum to break out.

Last Friday’s Non-Farm Payrolls confirmed the U.S. growth continues unabated. The economy generated 235,000 jobs versus forecasts of 196,000.

Even the unemployment rate declined for the right reasons as more individuals sought jobs rather than abandon the workforce. Although wage growth was slightly tepid at 0.2% versus 0.3%, it still remains on pace to grow at more than 2% this year.

All this data should make traders confident about U.S. yields and the prospects for the buck going forward. Yet despite the robust economic numbers, the greenback quickly gave back its gains and managed to close below the key 115.00 level against the Japanese yen on Friday.

Another Chance for the Buck

That has been the story since the start of this year. No matter how good U.S. data appears to be, no matter how hawkish the Fed, the dollar rally fizzles out very quickly.

But the dollar may have a final chance to break through the cement ceiling this week. The Ides of March promises to truly be an interesting day in the currency market. Indeed, this Wednesday, March 15, will be one of the busiest news days in recent memory.

Not only will markets see the latest U.S. Retail Sales figures, quickly followed by the Fed, but the day will continue into Asia as New Zealand reports its GDP, Australia releases its employment figures and the Bank of Japan holds its own meeting.

The prospect of a rollercoaster ride is high as sentiment could quickly shift from one global financial hub to another. At the core, however, the FOMC meeting looms largest of all. Fed Chief Janet Yellen has been uncharacteristically hawkish over the past month and given her stellar forecasting skills, she may be seeing more strength in the economy than is currently visible to the market.

We started this year with a baseline assumption of two rate hikes and have now moved to the consensus view that the Fed will hike three times in 2017. And some dollar bulls even expect Ms. Yellen to hike four times this year. If she dangles such a possibility, it’s difficult to see how the greenback would not rally off that news. One hundred basis points of yield would give the buck a huge premium on the yen and would attract carry traders looking to finally make some return.

Technically the key level in the pair is the 116.00 figure. If USD/JPY could propel itself to that level, it would provide the pair with enough escape velocity to signal a fresh rally in the dollar.

The PowerShares DB US Dollar Index Bullish (NYSE:UUP) was unchanged in premarket trading Wednesday. Year-to-date, UUP has declined -0.68%, versus a 5.98% rise in the benchmark S&P 500 index during the same period.

UUP currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 25 ETFs in the Currency ETFs category.

This article is brought to you courtesy of Money And Markets.

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