Fundamental Forecast for the US Dollar: Neutral
- While the DXY index added +0.07%, most of its gains were given back by the end of the week following a mid-December US jobs report.
- Not only are there going to be several ‘high’ ranked data releases in the coming days, but testimonials and speeches by several Federal Reserve policymakers that are destined to introduce more volatility to the financial markets.,
- according to tShe IG Client Sentiment Index, in US dollars a . Is Mixed Partiality Going in mid-January.
US Dollar Week in Review
The first week of the year proved to be disappointing for the US dollar. While the DXY index added +0.07%, most of its gains were given back by the end of the week following a mid-December US jobs report. EUR/USD rates ended -0.20% lower, while USD/JPY rates rose +0.33%. With risk appetite waning, higher beta pairs such as AUD/USD and NZD/USD fell by -1.24% and -1.07%, respectively. GBP/USD rates bucked the trend with a gain of +0.39%.
American Economic Calendar in Focus
With the holidays becoming official in the rearview mirror, the change in the second week of January brings a supersaturated US economic docket. Not only are several ‘high’ ranked data releases due in the coming days, but testimonials and speeches by several Federal Reserve policymakers are destined to present more volatility in financial markets in the wake of December Fed meeting minutes.
- The US Wholesale Inventory Report will be released on Monday, January 10. In the afternoon, the 3 month and 6 month bills are auctioned.
- On Tuesday, January 11, Kansas City Fed Chairman George will deliver a speech before testimony by Fed Chair Powell at his nomination hearing. In the afternoon there will be an auction of the 3-year note along with the release of the weekly US API Crude Oil Stock Report.
- Wednesday, January 12, weekly US MBA mortgage applications data are due in the morning, as is the December US Inflation Rate (CPI) report. The weekly US EIA Energy Stock Report will be released after the US Cash Equity Open. At noon, there is a 10-year note auction and the December US Monthly Budget Statement is due.
- On Thursday, January 13, Philadelphia Fed Chairman Harker will deliver remarks and release weekly US jobless claims figures. Incoming Fed Vice Chair Brainard will testify at her nomination hearing. In the afternoon, there are 4-week and 8-week bill auctions, Chicago Fed President Evans will deliver a speech, and a 30-year bond auction will take place.
- On Friday, January 14, figures for the December US Retail Sales Report, December US Industrial Production Report, and November US Business Inventory will be released ahead of the US Cash Equity Open. Later in the morning, the early January US Michigan Consumer Sentiment Survey is due. At the end of the day, New York Fed Chairman Williams will give remarks.
Atlanta Fed GDPNow 4Q’21 Growth Projection (January 6, 2021) (Chart 1)
Based on the data obtained so far 4Q’21, Atlanta Fed GDPNow Growth is now forecast at +6.7% annually, down from +7.4% on Jan 4thRecently released by the US Bureau of Economic Analysis, US Census Bureau, and the Institute for Supply Managementhas lowered US growth expectations as the COVID-19 Omicron variant infection rate has increased in recent weeks.
The next update for 4Q’21 is the Atlanta Fed GDPNow growth forecast due after the release of US wholesale inventory data Monday, January 10.
to complete american economic data forecast, view DailyFX Economic Calendar,
Market prices more aggressive for the Fed
We can use eurodollar contracts to measure whether the price of a Fed rate hike is happening by examining the difference in borrowing costs for commercial banks over a specific time frame in the future. Chart 2 Below shows the difference in cost of borrowing – spread – for January 2022 And the December 2023 contract, to find out where the interest rates are as of December 2023.
Eurodollar Futures Contract Spread (January 2022-December 2023) [BLUE], US 2s5s10s butterfly [ORANGE], DXY Index [RED]: Daily Chart (July 2021 to January 2022) (Chart 2)
By comparing Fed rate hike odds with the US Treasury 2s5s10s butterfly, we can find out whether the bond market is acting in line with what happened in 2013/2014, when the Fed announced its intention to reduce its QE program. was indicated. The 2s5s10s butterfly measures a non-parallel shift in the US yield curve, and if history is accurate, it means that intermediate rates should move faster than short-end or long-end rates.
1. Huh61.75-BPS rate hike waived till end of 2023 while 2s5s10s butterfly it’s right outside The widest spread (and its widest in 2021) since Fed taper talks began in June. Following the December Fed meeting minutes and the December US NFP report, rates markets are effectively pricing in, with a 100% chance of six 25-bps rate hikes and a 47% chance of seven 25-bps rate hikes by the end of next year – The most aggressive Fed rate pricing seen so far during the pandemic.
US Treasury Yield Curve (1-year to 30-year) (January 2020 to January 2022) (Chart 3)
Historically speaking, The combined effect of rising US Treasury yields – particularly as intermediate rates outpace short-end and long-end rates – along with advanced Fed rate hike odds have produced a favorable trading environment for the US dollar.
CFTC COT US Dollar Futures Positioning (January 2020 to January 2022) (Chart 4)
Finally, looking at the situation, as per CFTC’s COT for the week ended 7 December speculators His net-long US dollar position was reduced to 39,057 c. been donecontracts from 36,775 contracts. The net-long US dollar position remained near its highest level since October 2019, when the DXY index was trading above 98.00. A failure to push higher by the DXY Index could be a symptom of an oversaturated futures market, despite rising US Treasury yields and increased odds of a Fed rate hike.
— Written by Christopher Vecchio, CFA, Senior Strategist