U.S. DOLLAR FUNDMANTAL FORECAST: BULLISH
- Flattening yield curve impedes greenback prospects.
- Financial breather subsequent week.
DXY FUNDAMENTAL BACKDROP
The U.S. economic system is displaying strong efficiency metrics significantly within the labor market. Coupled with a hawkish central financial institution within the midst of utmost inflationary pressures, the dollar is but to take off as many anticipated. Markets are pricing in roughly 4 fee hikes in 2022 (see desk under) with a 97% likelihood scheduled for the January assembly.
FED RATE HIKE IMPLIED PROBABILITIES
With this aggressive tightening on the playing cards, bond markets have been comparatively muted and a flattening yield curve mirrored by the 2s10s (distinction between lengthy and brief time period bonds) curve under is an indicator that markets are apprehensive about the way forward for the U.S. economic system. Increased rates of interest and the Fed’s intention to cut back a ballooning stability sheet may harm financial development inside. Markets are due to this fact searching for increased returns elsewhere as an alternative of including to the already prolonged greenback longs. This being mentioned, the drop off proven by the Greenback Index (DXY) is prone to be short-lived as the general outlook stays slightly bullish.
U.S. YIELD CURVE (2s10s)
Subsequent week’s greenback financial calendar is pretty mild with no main bulletins scheduled. This could enable markets to digest final week’s slew of data and give attention to the broader macroeconomic setting. Martin Luther King Jr. Day subsequent week Monday the seventeenth ought to lead to skinny buying and selling volumes, so anticipate a bigger market strikes ought to something vital happen over the weekend and vacation interval.
U.S. DOLLAR INDEX DAILY CHART
Chart ready by Warren Venketas, IG
This week’s greenback sell-off noticed the important thing medium-term trendline help (black) unable stop additional draw back momentum. This noteworthy break opens up room for additional greenback depreciation to subsequent help ranges. This being mentioned, ought to Friday’s each day candle shut above the 95.00 psychological deal with, the draw back break could also be dominated as a false breakout. Equally, if costs hover simply beneath 95.00 and creep above after just a few buying and selling days, the identical precept would apply.
The Relative Power Index (RSI) additional helps this outlook with the momentum indicator impending on oversold ranges.
- 96.01 (50% Fibonacci)
Contact and observe Warren on Twitter: @WVenketas