EUR/USD, GBP/USD Best Ways to Express Bullish USD Bias
It's important to keep in mind "the forest" this week, instead of getting caught up looking at too many individual "trees." In other words, pricing action this week may pale in comparison to the larger moves that may be on the horizon. Indeed, the last two days of next week - December 3 and 4 - are being treated by markets as the most important two days of the year, and perhaps since September 2008, when Lehman Brothers collapsed. DailyFX Quantitative Strategist David Rodriguez articulated these points with his study on EUR/USD volatility prices on Friday, which is a must read during this holiday week.
In keeping with this theme of looking bigger picture - "the forest" - it's important to not focus on one single piece of economic data that's released today or tomorrow and extrapolating them to a conclusion about what the Fed might do on December 16. Thanks to the US Thanksgiving Day holiday on Thursday (and the accompanying liquidity drain), US economic data releases for the week have been compressed into the next two days. While it will be easy to overreact to one good or one bad print - looking at the individual "trees" - the only thing that matters is the aggregate impact of the data on rate expectations beyond December 16.
Given the forward looking nature of markets, we can't help but feel that a disappointing slate of US economic data in the weeks leading up to the December 16 Fed meeting may not delay a liftoff, but rather, reduce the frequency and magnitude of subsequent rate hikes. The Fed has typically take the courtesy of lowering expectations at each quarterly meeting through its Staff Economic Projections via the 'dot plot': each updated 'dot plot' this year showed reduced expectations for future policy rates. Any indication of a lower glide path of rates going forward could cap short-term US yields, and thus, remove what has been a source of strength for the greenback. The risk to the US Dollar here is asymmetrical: it needs data to consistently meet or beat expectations otherwise the risk of downside is significant.
History may have some precedence here. Later today, we'll be publishing our study on how the US Dollar Index (DXY) has performed after the start of all six Fed rate hike cycles going back to 1983.
Lastly, as we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."
--- Written by Christopher Vecchio, Currency Strategist
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