Will the Fed Derail the Greenback Rebound?

Weekly Fundamental US Dollar Forecast: Will the Fed Derail the Dollar Rebound?

Basic Forecast for the US Greenback: Impartial

  • Fed fee hike expectations have ratcheted increased in current weeks. If the FOMC disappoints, the US Dollar could also be in hassle.
  • What makes the US Greenback so susceptible to a FOMC disappointment? Positioning within the futures market – which stays close to its longest degree since October 2019.
  • In line with the IG Client Sentiment Index, the US Greenback has a combined bias heading into mid-January.

US Greenback Week in Assessment

The US Greenback snapped again final week, with the DXY Index closing up by +0.49%, practically eradicating its losses month-to-date (though stays -0.04% decrease in January). With the drums of European battle beating louder, EUR/USD charges notched a -0.62% loss, whereas GBP/USD charges fell by -0.86%. Weak point in threat belongings duly stoked demand for secure havens, with USD/CHF charges dropping by -0.22% and USD/JPY charges slipping by -0.43%.

US Financial Calendar in Focus

The upcoming week’s financial calendar will show consequential. The primary Federal Reserve coverage assembly of the yr has already stoked quite a lot of hypothesis in monetary markets, with excessive expectations for hints of an accelerated fee of financial tightening. Wednesday’s FOMC assembly might symbolize a big turning level for a quantity, not only for the US Greenback, however for all currencies and asset lessons.

  • On Monday, January 24, the December US Chicago Fed nationwide exercise index shall be launched within the morning forward of the January US Markit manufacturing PMI report.
  • On Tuesday, January 25, the November US home worth index is due 30-minutes forward of the US money fairness open, whereas the January US shopper confidence gauge shall be launched 30-minutes after US shares begin buying and selling.
  • On Wednesday, January 26, weekly US mortgage purposes information are due, as is the December US items commerce stability, forward of the US money fairness open. December US new residence gross sales figures shall be launched later within the morning. The January Federal Reserve fee determination and Fed Chair Jerome Powell’s press convention will arrive at 14 EST/19 GMT.
  • On Thursday, January 27, the December US sturdy items orders report, the preliminary 4Q’21 US GDP report, and weekly US jobless claims figures are due within the morning. December US pending residence gross sales will even be launched.
  • On Friday, January 28, the December US PCE worth index is due, as are December US private revenue and private spending figures. The January US Michigan shopper sentiment report is due later within the morning.

Atlanta Fed GDPNow 4Q’21 Development Estimate (January 19, 2021) (Chart 1)

Weekly Fundamental US Dollar Forecast: Will the Fed Derail the Dollar Rebound?

Primarily based on the info obtained to date about 4Q’21, the Atlanta Fed GDPNow development forecast is now at +5.1% annualized, up from +5% on January 14. The improve was a results of “the nowcast of fourth-quarter actual gross personal home funding development elevated from +18.1% to +18.6%.”

The ultimate replace to the 4Q’21 Atlanta Fed GDPNow development forecast is due on Wednesday, January 26 after the December US items commerce stability and December US new residence gross sales figures are launched.

For full US financial information forecasts, view the DailyFX economic calendar.

Market Pricing Factors to Aggressive Fed

We will measure whether or not a Fed fee hike is being priced-in utilizing Eurodollar contracts by inspecting the distinction in borrowing prices for business banks over a selected time horizon sooner or later. Chart 2 under showcases the distinction in borrowing prices – the unfold – for the February 2022 and December 2023 contracts, to be able to gauge the place rates of interest are headed by December 2023.

Eurodollar Futures Contract Unfold (February 2022-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Day by day Chart (August 2021 to January 2022) (Chart2)

Weekly Fundamental US Dollar Forecast: Will the Fed Derail the Dollar Rebound?

By evaluating Fed fee hike odds with the US Treasury 2s5s10s butterfly, we are able to gauge whether or not or not the bond market is performing in a way in line with what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts within the US yield curve, and if historical past is correct, because of this intermediate charges ought to rise quicker than short-end or long-end charges.

There are 156.75-bps of fee hikes discounted by way of the tip of 2023 whereas the 2s5s10s butterfly is simply off of its widest unfold because the Fed taper speak started in June. Forward of the January Fed assembly, charges markets are successfully pricing in a 100% probability of six 25-bps fee hikes and a 27% probability of seven 25-bps fee hikes by way of the tip of subsequent yr. Moreover, expectations for a 50-bps fee hike to start out the hike cycle have edged increased in current weeks.

US Treasury Yield Curve (1-year to 30-years) (January 2020 to January 2022) (Chart 3)

Weekly Fundamental US Dollar Forecast: Will the Fed Derail the Dollar Rebound?

The retracement in Fed hike odds coupled with declining US Treasury yields poses an issue for the US Greenback, nonetheless. If the FOMC makes clear that it’ll not hike charges by 50-bps in March, or means that inflation pressures are as a result of subside additional – implicitly suggesting that aggressive tightening isn’t warranted – then the US Greenback stays susceptible to a different swing decrease.

CFTC COT US Greenback Futures Positioning (January 2020 to January 2022) (Chart 4)

Weekly Fundamental US Dollar Forecast: Will the Fed Derail the Dollar Rebound?

Lastly, positioning, based on the CFTC’s COT for the week ended January 18, speculators decreased their net-long US Greenback positions to 36,402 contracts from 37,860 contracts. Regardless of having fallen for 2 weeks, net-long US Greenback positioning stays close to its highest degree since October 2019, when the DXY Index was buying and selling above 98.00. The oversaturated net-long place within the futures market stays a headwind for vital US Greenback upside within the near-term.

— Written by Christopher Vecchio, CFA, Senior Strategist

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