Fundamental Forecast for the US Dollar: Neutral
- While the DXY Index added +0.07%, most of its features got again by the top of the week following the middling December US jobs report.
- Not solely are there a number of ‘high’ ranked information releases due within the coming days, there are testimonies and speeches by a number of Federal Reserve policymakers that appear destined to introduce extra volatility to monetary markets.
- According to the IG Client Sentiment Index, the US Dollar has a blended bias heading into mid-January.
US Dollar Week in Review
The first week of the yr proved to be disappointing for the US Dollar. While the DXY Index added +0.07%, most of its features got again by the top of the week following the middling December US jobs report. EUR/USD charges completed decrease by -0.20%, whereas USD/JPY charges added +0.33%. With threat urge for food fading, excessive beta pairs like AUD/USD and NZD/USD fell again by -1.24% and -1.07%, respectively. GBP/USD charges bucked the pattern, gaining +0.39%.
US Economic Calendar in Focus
With the vacations official within the rearview mirror, the flip into the second week of January brings a few supersaturated US financial docket. Not solely are there a number of ‘high’ ranked information releases due within the coming days, there are testimonies and speeches by a number of Federal Reserve policymakers that appear destined to introduce extra volatility to monetary markets within the wake of the December Fed assembly minutes.
- On Monday, January 10, the November US wholesale inventories report will probably be launched within the morning. In the afternoon, are 3-month and 6-month invoice auctions.
- On Tuesday, January 11, Kansas City Fed President George will give a speech previous testimony by Fed Chair Powell at his nomination listening to. In the afternoon, there will probably be a 3-year notice public sale in addition to the discharge of the weekly US API crude oil inventory report.
- On Wednesday, January 12, weekly US MBA mortgage purposes figures are due within the morning, as is the December US inflation fee (CPI) report. After the US money fairness open the weekly US EIA vitality inventory studies will probably be launched. In the afternoon, there’s a 10-year notice public sale and the December US month-to-month funds assertion is due.
- On Thursday, January 13, Philadelphia Fed President Harker will give remarks and the weekly US jobless claims figures will probably be launched. Incoming Fed Vice Chair Brainard will give testimony at her nomination listening to. In the afternoon, there are 4-week and 8-week invoice auctions, Chicago Fed President Evans will give a speech, and there will probably be a 30-year bond public sale.
- On Friday, January 14, the December US retail gross sales report, the December US industrial manufacturing report, and the November US enterprise inventories figures will probably be launched forward of the US money fairness open. Later within the morning, the preliminary January US Michigan client sentiment survey is due. Rounding out the day, New York Fed President Williams will give remarks.
Atlanta Fed GDPNow 4Q’21 Growth Estimate (January 6, 2021) (Chart 1)
Based on the information obtained to date about 4Q’21, the Atlanta Fed GDPNow development forecast is now at +6.7% annualized, down from +7.4% on January 4. “Recent releases from the US Bureau of Economic Analysis, the US Census Bureau, and the Institute for Supply Management” have weighed down US development expectations because the COVID-19 omicron variant an infection fee has surged in latest weeks.
The subsequent replace to the 4Q’21 Atlanta Fed GDPNow development forecast is due on Monday, January 10 after November US wholesale inventories information are launched.
For full US financial information forecasts, view the DailyFX financial calendar.
Market Pricing for Fed More Aggressive
We can measure whether or not a Fed fee hike is being priced-in utilizing Eurodollar contracts by analyzing the distinction in borrowing prices for industrial banks over a selected time horizon sooner or later. Chart 2 under showcases the distinction in borrowing prices – the unfold – for the January 2022 and December 2023 contracts, with the intention to gauge the place rates of interest are headed by 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 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 fashion 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, which means intermediate charges ought to rise sooner than short-end or long-end charges.
There are 161.75-bps of fee hikes discounted by means of the top of 2023 whereas the 2s5s10s butterfly is simply off of its widest unfold for the reason that Fed taper discuss started in June (and its widest unfold of all of 2021). After the December Fed assembly minutes and December US NFP report, charges markets are successfully pricing in a 100% likelihood of six 25-bps fee hikes and a 47% likelihood of seven 25-bps fee hikes by means of the top of subsequent yr – essentially the most aggressive Fed fee pricing seen in the course of the pandemic to date.
US Treasury Yield Curve (1-year to 30-years) (January 2020 to January 2022) (Chart 3)
Historically talking, the mixed impression of rising US Treasury yields – notably as intermediate charges outpace short-end and long-end charges – alongside elevated Fed fee hike odds has produced a good buying and selling setting for the US Dollar.
CFTC COT US Dollar Futures Positioning (January 2020 to January 2022) (Chart 4)
Finally, taking a look at positioning, in keeping with the CFTC’s COT for the week ended December 7, speculators decreased their net-long US Dollar positions to 39,057 contracts from 36,775 contracts. Net-long US Dollar positioning continues to carry close to its highest degree since October 2019, when the DXY Index was buying and selling above 98.00. Failure by the DXY Index to push increased regardless of rising US Treasury yields and growing Fed fee hike odds could also be symptomatic of an oversaturated futures market.
— Written by Christopher Vecchio, CFA, Senior Strategist
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