The November FOMC meeting passed as expected with the Fed keeping rates on hold while reaffirming its view that further gradual increases are necessary. However, the market reaction we saw was more aggressive than we would usually expect, with USD strongly bid despite the Fed offering nothing new.
One likely reason for this is that a lot of USD buying was put on hold ahead of the US mid-terms and the November FOMC. While in both cases, the expected scenario came to pass, traders were waiting to see if there were any surprises which might pose a risk to a December rate hike, which is currently priced around 80%.
However, with the mid-terms yielding a divided Congress as expected and the Fed maintaining a positive tone and signaling further hikes to come, USD was strongly bid as all those side-lined investors got the green light to enter the market.
There was a slight fear that perhaps the Fed would cool its language somewhat, leading to speculation that we might not see any further hikes in Q1 2019. However, with the Fed maintaining a positive tone and highlighting the continued strong momentum in the labor market, traders are optimistic about further policy tightening and are expecting a stronger USD consequently.
The index is now putting pressure on the 96.86 level again with current demand suggesting the likelihood of seeing fresh 2018 highs over coming sessions. Price is still sitting above the broken bearish trend line from 2016 highs. However, we are currently trading within a rising wedge pattern which, until broken, poses the risk of a bearish reversal. The next key structural level to watch to the topside is the 98.64 level.