Something interesting is happening to the USD. After a bullish year fueled by FED rate hikes and hints at forthcoming “restrictive” policy, the Greenback is losing ground. For the second straight session, December USD Index futures are falling dramatically, eclipsing the 96.000 level. Are we seeing traders anticipate a shift in FED policy from gradual tightening to hold firm?

It is a distinct possibility. About a month ago, a December rate hike was all but certain. The CME FedWatch Index assigned a 78% chance of the target rate being raised to 2.5%. Now, FedWatch estimates are sitting above 68%. The markets appear to be questioning the future of FED policy following the results of the U.S. Midterm elections and subsequent weakness in equities.

December USD Index Futures

Last week was a bad one for December USD Index futures, as illustrated by the chart below. Values retreated from yearly highs above the 97.000 level to daily downside support.

Overview: For the time being, I will be watching today’s close in relation to the 78% Fibonacci retracement level (95.935) closely. If settlement is beneath this level, then a test of 95.500 is very likely by Wednesday’s close.

The coming five sessions will be indicative of holiday trading conditions. With no primary market drivers facing the USD scheduled, we may be in for some tight trade near the 96.000 level until Friday’s closing bell.