Make or break week for the Dollar ahead of Wednesday's Fed rate decision

So finally the time has come for the Fed to dictate the US Dollar’s outlook for the rest of the year and the foreseeable future as this week the central bank’s members are meeting to decide on the monetary policy they will follow. We have talking again and again about this meeting and its importance but it’s exactly that importance that makes us focus on it.

If the Fed decide to raise their key interest rate on Wednesday it will be the first time they do so since 2006 and the effect of their decision could be an enormous one. The Dollar is the global deposit currency and changes in its interest rate policy will affect all the global markets, from the Forex currency pairs where the Dollar is a part to the global stock indices. As we have mentioned many times, the bias and the estimate is that the Fed will go ahead and pull the trigger even though there are voices that believe it’s still too early.

On Friday the market’s focus was on the release of the Retail Sales report from the US and Dollar traders were hoping that a robust reading would seal the deal for the Fed and do away with all the doubters. Unfortunately for Dollar bulls the consumer report didn’t print as strong as expected with mixed signals across the board. Later in the day the University of Michigan Confidence levels also missed their mark capping any potential for a Dollar rally.

Nevertheless we expect volatility to be elevated this week and the Dollar to at least try to get some again leading up to Wednesday’s Fed meeting. Last minute repositioning and short-term speculators trying to benefit from the most likely development that is the Fed raising rates should support the Dollar and drive it higher. The Euro has corrected from its 1.1000 highs overnight and we could see a broader correction today.

Eurozone’s Industrial Production is the only piece of news pending for release today but with several ECB policymakers making public appearances today there is a high possibility that they will try and capitalize on that and talk down the Euro. ECB’s President Draghi doesn’t have any public speeches today but his colleagues might put the Single currency under pressure with the 1.0900 level being the short-term target and 1.0800 the next one.

The Cable is on a similar outlook correcting just below the 1.5200 level, the UK currency ticked above this resistance on Friday when the US Retail Sales report printed in a mixed manner but as we move closer to the FOMC meeting we could see more pressure on the Pound. The 1.5100 area appears as the important pivot level but if the Cable retreats below it then the 1.5000 support will be threatened pretty fast.