Fundamental Forecast for the US Dollar: Neutral
- The US Dollar (via the DXY Index) had a strong week up until Friday, when a superficial US jobs report provoked a deep setback for the greenback: the DXY Index barely notched a +0.11% last week.
- The economic calendar remains busy in the days ahead with a bevy of Federal Reserve speakers as well as the October US inflation report (consumer price index).
- According to the IG Client Sentiment Index, the US Dollar has a mixed bias heading into late-October.
US Dollar Week in Review
The US Dollar (via the DXY Index) had a strong week up until Friday, when a superficial US jobs report provoked a deep setback for the greenback. Headline US jobs gains were +261K, according to the nonfarm payrolls report, but the US unemployment rate rose to 3.7% and the household employment survey showed that the economy lost -338K jobs in October. Overall, after rally by as much as +2.24% on the week, the DXY Index only managed to squeak out a +0.11% gain. Gold prices in USD-terms (XAU/USD) were the notable standout, notching a +2.22% gain in the first week of November.
Economic Calendar Remains Busy
Last week produced several key US data releases and events, including the November Fed meeting and the October US jobs report. But the week ahead is still busy, marked by a bevy of Fed policymakers’ speeches and the October US inflation report.
- On Monday, November 7, the September US consumer credit change report is due at 20 GMT. Boston Fed President Collins and Cleveland Fed President Mester will give remarks at 20:40 GMT, as will Richmond Fed President Barkin at 23:00 GMT.
- On Tuesday, November 8, the 2022 US midterm elections will be held to determine the control of Congress in 2023 and 2024.
- On Wednesday, November 9, weekly US mortgage applications figures will be released at 12 GMT. September US wholesale inventories are due at 15 GMT. Richmond Fed President Barkin will speak at 16 GMT.
- On Thursday, November 10, weekly US jobless claims figures will be published at 13:30 GMT, as will the October US inflation report (consumer price index). Philadelphia Fed President Harker will give remarks at 14 GMT, followed by Dallas Fed President Logan at 14:35 GMT. Kansas City Fed President George will speak at 18:30 GMT. The October US monthly budget statement is due at 19 GMT.
- On Friday, November 11, the preliminary November US Michigan consumer sentiment survey will be published at 15 GMT.
Atlanta Fed GDPNow 4Q’22 Growth Estimate (November 3, 2022) (Chart 1)
Based on the limited data received thus far about 4Q’22, the Atlanta Fed GDPNow growth forecast is now at +3.6% annualized. The shift was due to “the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth [increasing] from 2.9% and -1.3%, respectively, to 4.0% and 0.7%, respectively, while the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth decreased from 0.74% to 0.62%.”
For full US economic data forecasts, view the DailyFX economic calendar.
Rate Hike Expectations Ease Back, Slightly
We can measure whether a Fed rate hike is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Chart 1 below showcases the difference in borrowing costs – the spread – for the November 2022 and January 2023 contracts, in order to gauge where interest rates are headed at the December Fed meeting.
Eurodollar Futures Contract Spread (October 2022-January 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: 4-hour Timeframe (November to January 2022) (Chart 1)
In recent weeks, the flattening of 2s5s10s Treasury butterfly has proved to be a leading indicator for the US Dollar. Thus, while Fed rate hike odds for the December meeting remain elevated – continuing to discount a 50-bps rate hike (66% chance) – the DXY Index still managed to pullback meaningfully at the end of last week.
US Treasury Yield Curve (1-year to 30-years) (November 2020 to November 2022) (Chart 3)
The shape of the US Treasury yield curve – inverted near -50-bps, just off of its deepest inversion since September 1981 – suggests that the factors driving US Dollar strength haven’t abated. Despite coming off of recent highs, US real rates (nominal less inflation expectations) continue to remain elevated, softening the recent slide by the US Dollar.
CFTC COT US Dollar Futures Positioning (November 2020 to November 2022) (Chart 4)
Finally, looking at positioning, according to the CFTC’s COT for the week ended November 1, speculators slightly decreased their net-long US Dollar positions to 29,801 contracts from 30,108 contracts. Given the steep selloff at the end of last week, a further deterioration in net-long positioning should be anticipated in the next weekly update. Overall, US Dollar positioning remains near its most net-long levels in over five years; the long US Dollar trade remains overcrowded.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
