HomeForex MarketJuly Fed Assembly in Focus

July Fed Assembly in Focus

Basic Forecast for the US Greenback: Impartial

  • Markets are discounting a 75-bps charge hike from the Fed this week. That won’t be sufficient for the US Greenback.
  • After the July Fed assembly, there may be one 25-bps charge hike priced-in by the tip of 2022.
  • In response to the IG Shopper Sentiment Index, the US Greenback has a combined bias heading into the primary week of June.

US Greenback Week in Overview

The US Greenback (through the DXY Index) fell final week for the primary time in a month, posting its worst weekly efficiency in two months with a lack of -1.33%. The 2 largest elements of the greenback gauge led the best way, with EUR/USD charges climbing +1.27% and USD/JPY charges dropping by -1.75%. GBP/USD charges posted a strong acquire as nicely, including +1.16%. Weakening US financial information has led to a speedy deterioration in charge hike odds for the Federal Reserve, undercutting US Treasury yields and thus a major supply of US Greenback energy in current months.

A Full US Financial Calendar

The approaching week is saturated with necessary US financial information releases, every of which have the potential to upend FX markets. However no occasion or information launch carries extra significance than the July Fed assembly, the place it’s broadly anticipated one other vital charge hike can be levied. Whereas that could be crucial occasion of the week, the sheer quantity of ‘excessive’ rated occasions implies that volatility in FX markets will possible run greater within the coming days, at the least for USD-pairs.

  • On Monday, July 25, the June US Chicago Fed nationwide exercise index can be launched at 12:30 GMT.
  • On Tuesday, July 26, the Could US home worth index is ready to be printed at 13 GMT, adopted by the July US Convention Board client confidence index and the June US new dwelling gross sales report at 14 GMT.
  • On Wednesday, July 27, weekly US mortgage purposes are due at 11 GMT. June US sturdy items orders will come out at 12:30 GMT, as will the June US retail inventories report. June US pending dwelling gross sales can be launched at 14 GMT. The July Fed charge determination can be introduced at 18 GMT, adopted by Fed Chair Jerome Powell’s press convention at 18:30 GMT.
  • On Thursday, July 28, the preliminary 2Q’22 US GDP report can be printed at 12:30 GMT, as will weekly US jobless claims.
  • On Friday, July 29, the June US PCE worth index is due at 12:30 GMT, as are the June US private revenue and private spending studies. The ultimate July US Michigan client sentiment report can be launched at 14 GMT.

Atlanta Fed GDPNow 2Q’22 Progress Estimate (July 19, 2022) (Chart 1)

Weekly Fundamental US Dollar Forecast: July Fed Meeting in Focus

Based mostly on the information acquired up to now about 2Q’22, the Atlanta Fed GDPNow development forecast is now at -1.6% annualized, down from -1.5% on July 15. The downgrade was resulting from “second-quarter actual residential funding development [decreasing] from -8.8% to -10.1%.” The subsequent replace to the 2Q’22 Atlanta Fed GDPNow development forecast is due on Wednesday, July 27, forward of the July Fed assembly.

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

Not Many Extra Charge Hikes Anticipated

We will measure whether or not a Fed charge 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 1 under showcases the distinction in borrowing prices – the unfold – for the entrance month/August 2022 and December 2022 contracts, with the intention to gauge the place rates of interest are headed by the tip of this 12 months.

Eurodollar Futures Contract Unfold (August 2022-December 2022) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Day by day Timeframe (July 2021 to July 2022) (Chart 1)

Weekly Fundamental US Dollar Forecast: July Fed Meeting in Focus

By evaluating Fed charge 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 in keeping 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 a narrowing of this measure has traditionally been a unfavorable growth for the US Greenback.

After the Fed raises charges by 75-bps this week, there is just one 25-bps charge hike discounted by the tip of 2022. Coupled with motion within the 2s5s10s butterfly, the market’s interpretation of the near-term path of Fed charge hikes has grow to be decidedly much less hawkish. As markets are ever-forward wanting, this week’s charge hike from the Fed is probably not a bullish catalyst for the US Greenback if further charge hikes this 12 months usually are not signaled.

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

Weekly Fundamental US Dollar Forecast: July Fed Meeting in Focus

The form of the US Treasury yield curve coupled with declining Fed charge hike odds is appearing as a headwind for the US Greenback. US actual charges (nominal much less inflation expectations) have eased again as nicely, and now that different main currencies are seeing their very own actual charges rise due to extra aggressive central financial institution motion, the financial coverage expectations hole that the US Greenback constructed up over the previous few months has narrowed, eroding the US Greenback’s relative benefit.

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

Weekly Fundamental US Dollar Forecast: July Fed Meeting in Focus

Lastly, taking a look at positioning, in response to the CFTC’s COT for the week ended July 19, speculators elevated their net-long US Greenback positions to 39,071 contracts from 38,353 contracts. US Greenback positioning remains to be stretched by historic requirements, although it’s now not at its most net-long degree since March 2017.

— Written by Christopher Vecchio, CFA, Senior Strategist

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