HomeForex MarketPrice Hike Odds Buoy the Buck

Price Hike Odds Buoy the Buck

Basic Forecast for the US Greenback: Impartial

  • US Treasury yields proceed to rise in accordance with quickly escalating Fed price hike odds, underpinning US Greenback power.
  • The March US nonfarm payrolls report on Friday could also be dwarfed by the continuing commentary from Federal Reserve policymakers {that a} 50-bps price hike is coming at their subsequent assembly.
  • Based on the IG Shopper Sentiment Index, the US Greenback has a blended bias heading into the final week of March.

US Greenback Week in Evaluation

The US Greenback shrugged off a poor efficiency in mid-March, closing final week greater by +0.59%, its sixth weekly acquire over the previous seven weeks total. However the headline acquire masks a extra sophisticated story: the US Greenback misplaced floor towards most currencies final week. GBP/USD charges had been up by +0.03%, USD/CHF charges misplaced -0.13%, and USD/CAD charges dropped by -1.02%. As an alternative, the heavy lifting was accomplished by EUR/USD and USD/JPY charges, with the previous shedding -0.62% and the latter including a formidable +2.47%.

US Financial Calendar in Focus

Like for many of the previous month, it stays the case that US financial knowledge will not be a major issue within the US Greenback’s current success or failures. Markets are paying extra consideration to what Federal Reserve policymakers are saying, insofar as they’ve been ‘foaming the runway’ for a 50-bps price hike once they meet subsequent in Might, kind of neutering the significance of information releases till then. Furthermore, greater commodity costs and interbank market funding stresses ensuing from Russia’s invasion of Ukraine and the following sanctions by the European Union and america retain important sway over market circumstances.

With that mentioned, right here’s the US financial knowledge due out within the coming days:

  • On Monday, March 28, the February US items commerce stability and the February US retail inventories (ex-autos) can be launched at 12:30 GMT.
  • On Tuesday, March 29, the January US home value index can be printed at 13 GMT, adopted by a speech by New York Fed President John Williams. March US shopper confidence figures can be in focus at 14 GMT.
  • On Wednesday, March 30, weekly US mortgage functions figures can be launched at 11 GMT adopted by the March US ADP employment change report at 12:15 GMT. Shortly thereafter, the ultimate 4Q’21 US GDP report can be printed.
  • On Thursday, March 31, a plethora of information releases are due out at 12:30 GMT: the February US PCE report; weekly US jobless claims; February US private revenue figures; and February US private spending figures. At 13 GMT, New York Fed President Williams will give remarks.
  • On Friday, April 1, the March US nonfarm payrolls report can be printed at 12:30 GMT, as will the March US unemployment price. The March US ISM manufacturing PMI and February US building spending knowledge can be launched at 14 GMT.

Atlanta Fed GDPNow 1Q’22 Development Estimate (March 24, 2021) (Chart 1)

Weekly Fundamental US Dollar Forecast: Rate Hike Odds Buoy the Buck

Primarily based on the info obtained so far about 1Q’22, the Atlanta Fed GDPNow development forecast is now at +0.9% annualized, down from +1.3% on March 17. The downgrade was a results of “actual gross personal home funding development [decreasing] from -4.2% to -5.8%.”

The subsequent replace to the 1Q’22 Atlanta Fed GDPNow development forecast is due on Thursday, March 31 after the February US private revenue and spending knowledge.

For full US financial knowledge forecasts, view the DailyFX financial calendar.

Fed Turns Up Hawkish Rhetoric

A slew of hawkish feedback over the previous week, led by Fed Chair Jerome Powell himself, have dramatically escalated expectations that not solely will the FOMC raises charges by 50-bps once they meet subsequent in Might, however will represent an much more aggressive financial tightening effort over the approaching months.

We are able to measure whether or not a Fed price 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 March 2022 and December 2023 contracts, to be able to gauge the place rates of interest are headed by December 2023.

Eurodollar Futures Contract Unfold (March 2022-December 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Day by day Timeframe (March 2021 to March 2022) (Chart1)

Weekly Fundamental US Dollar Forecast: Rate Hike Odds Buoy the Buck

By evaluating Fed price hike odds with the US Treasury 2s5s10s butterfly, we are able to gauge whether or not or not the bond market is appearing in a fashion per 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, because of this intermediate charges ought to rise quicker than short-end or long-end charges.

There are now eight25-bps price hikes discounted via the tip of 2023. Rates markets are discounting a78% probability of 9 25-bps price hikes via the tip of subsequent yr. Concurrently, the 2s5s10s butterfly has widened sharply in current weeks. Each of those developments are per sustained US Greenback power, notably towards decrease yielding counterparts just like the Euro and the Japanese Yen.

US Treasury Yield Curve (1-year to 30-years) (March 2020 to March 2022) (Chart 3)

Weekly Fundamental US Dollar Forecast: Rate Hike Odds Buoy the Buck

The widening of the 2s5s10s butterfly coupled with rising US Treasury yields helps reinforce US Greenback power. The continued rise in US inflation expectations (as measured by the 2y2y and 5y5y inflation swap forwards) coupled with proof of liquidity stresses persisting recommend that the US Greenback will stay resilient, no matter what’s occurring on the financial calendar. Bonds proceed to commerce as if the Fed will increase charges for not simply a number of conferences in a row, but additionally in 50-bps increments.

CFTC COT US Greenback Futures Positioning (March 2020 to March 2022) (Chart 4)

Weekly Fundamental US Dollar Forecast: Rate Hike Odds Buoy the Buck

Lastly, positioning, in accordance with the CFTC’s COT for the week ended March 22, speculators elevated their net-long US Greenback positions to 29,597 contracts from 28,345 contracts. Internet-long US Greenback positioning has rebounded from its lowest stage for the reason that first week of October 2021, however stays -24% under its excessive of this yr.

— Written by Christopher Vecchio, CFA, Senior Strategist

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