Jump to content

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

Recommended Posts

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


  • Fed rate hike expectations have ratcheted higher in recent weeks. If the FOMC disappoints, the US Dollar may be in trouble.
  • What makes the US Dollar so vulnerable to a FOMC disappointment? Positioning in the futures market – which remains near its longest level since October 2019.
  • According to the IG Client Sentiment Index, the US Dollar has a mixed bias heading into mid-January.


The US Dollar snapped back last week, with the DXY Index closing up by +0.49%, nearly eradicating its losses month-to-date (although remains -0.04% lower in January). With the drums of European war beating louder, EUR/USD rates notched a -0.62% loss, while GBP/USD rates fell by -0.86%. Weakness in risk assets duly stoked demand for safe havens, with USD/CHF rates dropping by -0.22% and USD/JPY rates slipping by -0.43%.


The upcoming week’s economic calendar will prove consequential. The first Federal Reserve policy meeting of the year has already stoked a great deal of speculation in financial markets, with high expectations for hints of an accelerated rate of monetary tightening. Wednesday’s FOMC meeting could represent a significant turning point for a number, not just for the US Dollar, but for all currencies and asset classes.

  • On Monday, January 24, the December US Chicago Fed national activity index will be released in the morning ahead of the January US Markit manufacturing PMI report.
  • On Tuesday, January 25, the November US house price index is due 30-minutes ahead of the US cash equity open, while the January US consumer confidence gauge will be released 30-minutes after US stocks start trading.
  • On Wednesday, January 26, weekly US mortgage applications data are due, as is the December US goods trade balance, ahead of the US cash equity open. December US new home sales figures will be released later in the morning. The January Federal Reserve rate decision and Fed Chair Jerome Powell’s press conference will arrive at 14 EST/19 GMT.
  • On Thursday, January 27, the December US durable goods orders report, the initial 4Q’21 US GDP report, and weekly US jobless claims figures are due in the morning. December US pending home sales will also be released.
  • On Friday, January 28, the December US PCE price index is due, as are December US personal income and personal spending figures. The January US Michigan consumer sentiment report is due later in the morning.


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

Based on the data received thus far about 4Q’21, the Atlanta Fed GDPNow growth forecast is now at +5.1% annualized, up from +5% on January 14. The upgrade was a result of “the nowcast of fourth-quarter real gross private domestic investment growth increased from +18.1% to +18.6%.”

The final update to the 4Q’21 Atlanta Fed GDPNow growth forecast is due on Wednesday, January 26 after the December US goods trade balance and December US new home sales figures are released.

For full US economic data forecasts, view the DailyFX economic calendar.


We can measure whether a Fed rate hike is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Chart 2 below showcases the difference in borrowing costs – the spread – for the February 2022 and December 2023 contracts, in order to gauge where interest rates are headed by December 2023.


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

By comparing Fed rate hike odds with the US Treasury 2s5s10s butterfly, we can gauge whether or not the bond market is acting in a manner consistent with what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts in the US yield curve, and if history is accurate, this means that intermediate rates should rise faster than short-end or long-end rates.

There are 156.75-bps of rate hikes discounted through the end of 2023 while the 2s5s10s butterfly is just off of its widest spread since the Fed taper talk began in June. Ahead of the January Fed meeting, rates markets are effectively pricing in a 100% chance of six 25-bps rate hikes and a 27% chance of seven 25-bps rate hikes through the end of next year. Furthermore, expectations for a 50-bps rate hike to start the hike cycle have edged higher in recent weeks.


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 a problem for the US Dollar, however. If the FOMC makes clear that it will not hike rates by 50-bps in March, or suggests that inflation pressures are due to subside further – implicitly suggesting that aggressive tightening isn’t warranted – then the US Dollar remains vulnerable to another swing lower.


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

Finally, looking at positioning, according to the CFTC’s COT for the week ended January 18, speculators decreased their net-long US Dollar positions to 36,402 contracts from 37,860 contracts. Despite having fallen for two weeks, net-long US Dollar positioning remains near its highest level since October 2019, when the DXY Index was trading above 98.00. The oversaturated net-long position in the futures market remains a headwind for significant US Dollar upside in the near-term.


Written by Christopher Vecchio, CFA, Senior Strategist. DailyFX 23rd Jan 2022

Link to comment

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • General Statistics

    • Total Topics
    • Total Posts
    • Total Members
    • Most Online
      10/06/21 10:53

    Newest Member
    Joined 30/11/23 13:38
  • Posts

    • that's the plan, but I see it as a slow process
    • US dollar on bearish path, USD/JPY tests support, USD/CAD eyes rebound, and AUD/USD faces overbought challenges.   Source: Bloomberg   Forex Shares United States dollar Market trend USD/CAD AUD/USD    Diego Colman | Market Analyst, New York | Publication date: Thursday 30 November 2023 06:54 USD/JPY technical analysis USD/JPY (大口) has been on a major bullish run since the beginning of the year, it has trended lower in recent days following several unsuccessful attempts at clearing overhead resistance in the 152.00 region. After the latest pullback, which has been accelerated by falling US yields, the pair has arrived at the doorsteps of an important floor near 147.25. The integrity of this technical area is vital; failure to maintain it could trigger a drop towards channel support at 146.00. On further weakness, attention shifts to 144.50. In the event of a bullish turnaround, the first obstacle that could hinder upside progress appears at 149.70. Overcoming this resistance level might prove challenging for the bulls, yet doing so could spark a rally towards 150.90, possibly followed by a retest of this year's high. USD/JPY price action chart   Source: TradingView USD/CAD technical analysis USD/CAD has also corrected lower this month, but it has started to perk up after encountering support near 1.3570-1.3555, where the 100-day simple moving average converges with a short-term rising trendline. Maintaining this floor will bring stability to the pair, and may create the right conditions for a rebound toward 1.3630. Further strength could redirect focus towards the 1.3700 handle. On the other hand, if USD/CAD resumes its descent and breaks below cluster support stretching from 1.3570 to 1.3555, we may see a drop towards the 200-day simple moving average, just above the psychological 1.3500 mark. Prices could gain a foothold in this area on a pullback, but in the event of a breakdown, a move towards 1.3400 seems very possible. USD/CAD price action chart   Source: TradingView AUD/USD technical analysis The downturn in the broader US dollar has benefited the Aussie significantly in recent weeks. For instance, AUD/USD has staged a solid rally in November, briefly touching its strongest level since early August during the overnight session. While AUD/USD retains a constructive short-term bias, solidifying confidence in the bullish outlook requires a decisive move above trendline resistance at 0.6675. Given the pair’s overbought conditions in recent days, this scenario may take some time to develop, but an abrupt and unexpected breakout could still propel the exchange rate towards the 0.6800 handle. Conversely, if upward pressure fades and sellers regain decisive control of the market, primary support rests at 0.6620/0.6600 and then 0.6580, near the 200-day simple moving average. On further weakness, we could see a retrenchment towards 0.6525. AUD/USD price action chart   Source: TradingView       This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
  • Create New...