US Dollar – What is Next After the Fed Rate Hike?

Points to consider with this article:

• US Federal Reserve raises rates last week for the first time since 2006.
• The Dollar was supposed to move lower. Will it continue to rally in January?

The US Federal Reserve (Fed) raised its benchmark prime rate, for the first time in over a decade, last week by 25 basis points. The Dollar moves a bit lower. Now what is next for the almighty buck?

US Dollar volatility is likely to all going into the last two weeks of this year. Thus traders need to focus on the beginning of 2016 and the first week. Things should be relatively straight forward and traders will narrowly focus on future decisions by the Fed. This will make the buck sensitive to key economic data and Fed member speeches.

With raising rates at their December FOMC policy meeting, the Fed predicted they would vote for at least 100 basis points in further increases through 2016. This is not very surprising. This means a 25 basis point increase every quarter of fiscal 2016. This is well above the consensus forecasts and does raise some eyebrows.

According to the Fed Funds Futures as well as Overnight Index Swaps, traders are expecting around 50 basis points in rate hikes in 2016. In a world of negative rates, ranges and zero rates, the difference between 50 and 100 basis points is likely to cause a lot of volatility this coming New Year.

Traders will need to wait until January to get the next big economic data release from the United States. Until then, and during the Christmas and holiday season, volatility will remain low. Also, liquidity will be low. Volatility into year-end will remain low, however intraday spikes can and probably will happen. This, in itself, will present some financial risks to portfolios.