Elementary Forecast for the US Greenback: Impartial
- Whereas there are solely three ‘excessive’ rated occasions within the days forward, a slew of ‘medium’ ranked US information releases will hold occasion danger on the radar Tuesday via Friday.
- Forward of the December Fed assembly, charges markets are successfully pricing in a 91% probability of 5 25-bps price hikes over the subsequent two years – not considerably modified from previous to Thanksgiving, when Fed Chair Powell’s extra hawkish commentary emerged.
- In response to the IG Consumer Sentiment Index, the US Greenback has a combined bias heading into mid-December.
US Greenback Week in Overview
Per its mediocre December seasonal tendency, the US Greenback (through the DXY Index) edged decrease through the second week of the month. The DXY Index shed -0.11% over the week, and is now up by +0.18% in December. The most important part of the DXY Index, EUR/USD, added +0.09%. GBP/USD charges gained +0.27% whereas USD/JPY charges appreciated +0.50%. The commodity foreign money trio had been essentially the most important movers on the week. USD/CAD charges dropped by -0.87%, whereas two non-DXY parts, AUD/USD and NZD/USD charges, added +2.49% and +0.71%, respectively.
US Financial Calendar in Focus
The center of December brings about one other saturated financial calendar for the US economic system. Whereas there are solely three ‘excessive’ rated occasions within the days forward, a slew of ‘medium’ ranked releases will hold occasion danger on the radar Tuesday via Friday. Federal Reserve policymakers’ speeches resume on the finish of the week after the communications blackout interval ends.
- On Tuesday, December 14, the November US producer value index (PPI) might be launched, bringing forth one other set of inflation information.
- On Wednesday, December 15, the morning will characteristic weekly US MBA mortgage purposes, November US retail gross sales, October US enterprise inventories, and the December US NAHB housing market index. The afternoon will convey forth the December Fed assembly through which a brand new Abstract of Financial Projections (SEP) might be launched, Fed Chair Jerome Powell’s press convention, and October US internet long-term TIC flows.
- On Thursday, December 16, the entire important financial information are due both proper earlier than or proper after the beginning of the US money fairness session. Weekly US jobless claims are due, as are November US constructing permits and November US housing begins. The December US Philadelphia Fed manufacturing index and November US industrial productions figures are additionally set for publication. Lastly, the December US Markit manufacturing PMI will arrive.
- On Friday, December 17, Fed Governor Christopher Waller will give a speech as the primary Fed policymaker to speak after the communications blackout veil is lifted.
Atlanta Fed GDPNow 4Q’21 Development Estimate (December 9, 2021) (Chart 1)
Primarily based on the information obtained up to now about 4Q’21, the Atlanta Fed GDPNow development forecast is now at +8.7% annualized. The elevated forecast comes as “the nowcast of the contribution of stock funding to fourth-quarter actual GDP development elevated from +1.51% to +1.59%.”
The following replace to the 4Q’21 Atlanta Fed GDPNow development forecast is due on Wednesday, December 15 after US retail gross sales and inventories figures are launched.
For full US financial information forecasts, view the DailyFX financial calendar.
Market Pricing for Fed Stays Aggressive
We will measure whether or not a Fed price hike is being priced-in utilizing Eurodollar contracts by inspecting the distinction in borrowing prices for business banks over a particular time horizon sooner or later. Chart 2 beneath showcases the distinction in borrowing prices – the unfold – for the December 2021 and December 2023 contracts, with the intention to gauge the place rates of interest are headed by December 2023.
Eurodollar Futures Contract Unfold (NOVEMBER 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Each day Chart (January 2021 to December 2021) (Chart 2)
By evaluating Fed price hike odds with the US Treasury 2s5s10s butterfly, we will 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 if historical past is correct, because of this intermediate charges ought to rise sooner than short-end or long-end charges.
There are 146.75-bps of price hikes discounted via the tip of 2023 whereas the 2s5s10s butterfly is simply off of its widest unfold because the Fed taper discuss started in June (and its widest unfold of all of 2021). Forward of the December Fed assembly, charges markets are successfully pricing in a 91% probability of 5 25-bps price hikes over the subsequent two years – not considerably modified from previous to Thanksgiving, when Fed Chair Powell’s extra hawkish commentary emerged.
With the intention to obtain such a price elevate off, the Federal Reserve will seemingly want to start price hikes by mid-2022. As such, in keeping with feedback made by Fed Chair Powell in addition to incoming Fed Vice Chair Lael Brainard, it appears extra seemingly than not that the FOMC will announce an accelerated timeline to taper its QE program, rising the speed of tapering from $15B/month to $30B/month starting in January 2022. This is able to finish the Fed’s QE program in March 2022, permitting for the primary 25-bps price hike by June 2022.
US Treasury Yield Curve (1-year to 30-years) (December 2019 to December 2021) (Chart 3)
Traditionally talking, the mixed impression of falling US Treasury yields – significantly as intermediate charges outpace short-end and long-end charges – alongside elevated Fed price hike odds has produced a good buying and selling surroundings for the US Greenback.
CFTC COT US Greenback Futures Positioning (December 2020 to December 2021) (Chart 4)
Lastly, taking a look at positioning, in line with the CFTC’s COT for the week ended December 7, speculators decreased their net-long US Greenback positions to 34,867 contracts from 35,841 contracts. Internet-long US Greenback positioning continues to carry close to its highest degree since October 2019, when the DXY Index was buying and selling above 98.00.
— Written by Christopher Vecchio, CFA, Senior Strategist
DailyFX offers foreign exchange information and technical evaluation on the developments that affect the worldwide foreign money markets.