This week will see an important event for the U.S. dollar: the Federal Reserve's policy meeting. While investors seek to gauge the future direction of monetary policy whether or not the Fed tapers this week is unlikely to be a major factor for the U.S. dollar index.
Concerns about Fed tapering weighed on global markets throughout much of 2013 after the U.S. central bank first raised the possibility of reducing its $85-billion-a-month bond-purchase program in May. The central bank finally began tapering in December 2013, reducing its bond monthly purchases by $10 billion. It followed suit in January and March of 2014, bringing monthly purchases down to $55 billion.
Investors are keen to see whether or not the central bank continues down this path at this week's Federal Open Market Committee meeting. So, what's the story with the Federal Reserve's tapering of its monthly bond-purchase program and the U.S. ?
The story, as it turns out, is that there is no story. The U.S. dollar index has been stuck in a sideways trading band since September 2013. It's a different style of trading in a low-volatility environment.
The lower edge of the trading band is support near 79.0, while the upper edge is resistance near 81.5. Generally, movement between the upper and lower edges of the trading band tends to be sedate. There are some sharp intraday moves which provide scalping opportunities for related U.S. dollar pairs.
By applying our ANTSSYS trading approach we can identify trading opportunities in order to capture 60 to 140 pips a trade. The structure of the sideways trading band for the dollar index makes this a profitable and low-risk trading approach.
The key feature of the dollar index chart is the lack of trend direction. This is range bound trading which lowers the risk of any sudden or dramatic change in trend direction. There's a low probability of a breakout above 81.5; when the dollar Index reaches this level it presents a low-risk short trade. Conversely, the risk of a downside break below 79.0 is also low; this presents a low-risk long-side trade when the dollar index falls to this level.
Tapering, or the talk of tapering, by the Federal Reserve is an old story that has lost its ability to shock markets. The impact of tapering has already been discounted by the market, which is reflected in the activity of the dollar index chart. It offers good trading opportunities but the story is that there is no story – just profits.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.