VOT Research Report
Market Analytics and Considerations
The U.S. dollar plummeted this week following weaker-than-expected U.S. inflation data
Slowing price pressures may lead the Federal Reserve to adopt a less hawkish stance, prompting policymakers to slow the pace of interest rate hikes as soon as their next meeting
The downward correction in yields could push the dollar lower in the near term
The latest U.S. inflation report shocked to the unexpected by a considerable margin, forcing traders to reprice lower the course of monetary policy. As measured by the DXY index, the U.S. dollar fell about 4% this week to its cheapest showing with almost three months (106.4).
The headline CPI for October came in at 7.7% yoy versus the projected 8.0% yoy, marking a significant improvement in the struggle to bring back price stability. The core gauge also decreased, dropping to 6.3% from 6.6% earlier as a result of a sharp drop in healthcare expenses.
The positive news made it more likely for the Fed to slow the rate of interest rate hikes as early as next month. As a result, traders are now giving a chance of further than 80% to a boost of 50 basis points and are all but ruling out an increase of 75 basis points in December.
Source: CME Group
Due to these events, the Fed’s 2023 futures have indicated a lower FOMC terminal rate, which has caused a dramatic decline in U.S. Treasury rates (see last chart). One report won’t break a tendency and won’t persuade authorities to change their direction, but as traders try to anticipate the central bank’s next moves, it might place a ceiling on bond yields. In this setting, the U.S. dollar will struggle.
FED FUNDS FUTURES FOR 2023 (IMPLIED YIELD) – Chart source: TradingView
The escalating rebound in the stock market over the previous two sessions is a clear indication that mood is rising, which could have an adverse effect on the dollar in the near future. High-beta currencies may prolong their gains against by the dollar in the days ahead if stocks continue to soar, which would open the door for more drops in the DXY index.
While speculators who just sold off their bearish bets in the U.S. dollar would be tempted to book profits, causing a technical bounce, such bounce might only last until fresh information, such as macroeconomic data or Fedspeak, emerges. Having said that, the USD’s near-term risk/reward balance seems to be skewed to the lower.
Technical Perspective
Weekly Simple Moving Averages
|
Dollar Index |
110.566 |
110.929 |
108.985 |
103.074 |
97.570 |
97.121 |
