There has been a huge USD bull run throughout 2022. Weakness has consistently been bought into as the uptrend has surged. However, as the time for a Fed pivot edges closer, there are signs that the USD bull run is reaching maturity and could begin to reverse. Now, it is not there yet, but as the USD weakens once more this week, the signs are growing.
- Rising real yields are struggling to drag the USD higher.
- Falling volatility on Treasuries and USD futures suggests the fear trade is ebbing away.
- The USD bull trend is increasingly being questioned.
- Crucial crossroads levels are being tested on major forex pairs.
The Fed pivot is not here, yet
After the hawkish FOMC meeting at the beginning of November, there was a flood back into the USD. Fed chair Powell insisted that it was not the journey to get there, but the destination for Fed rate hikes.
The destination was likely to be higher than the Fed previously thought (dots in September were pointing to the terminal rate being around 4.6%). Fed Funds futures point to markets pricing the terminal rate of just over 5%.
So further rate hikes are likely in the coming meetings. However, Fed members are vocal in their concerns about the impact of rate hikes. Also according to the FOMC Statement, the Fed is data-dependent. Last Friday’s Nonfarm Payrolls were mixed but now increasingly show sliding wage growth and unemployment starting to rise. Will this now mean that Fed Funds futures have hit their limit above 5%? The way that the USD has been sold in the past few sessions suggests that market sentiment on the dollar bull run has shifted.
Bond market moves are failing to support USD now
Since last Friday, rising US Treasury yields have done little to support the USD, but notably, falling yields have hit the USD. We are now seeing that US real yields are rising but a USD uptrend since August has been broken.
It is also interesting to see that volatility on US Treasuries (measured on the Bank of America MOVE Index of bond market volatility) has been falling for the past few weeks. There is still an uptrend in place for the past 12 months, however, if this decline continues it would be significant. Falling bond market volatility suggests that there is less “fear” in market moves. This drives flow away from safe haven USD positions.
We can also see the implications of this in forex markets too. The Deutsche Bank Currency Volatility Index is also falling back. Once more, this reflects less fear in market moves and if this continues it would drive flow out of the USD.
USD is under pressure
Previously, throughout 2022, any USD corrective moves within the bull trend have been fairly orderly. However, throughout October into November there have been some significant swings in the USD as it has retreated to the big nine-month uptrend.
This suggests that there is a big shift in balance. There are serious question marks over the longevity of the USD bull run.
We now see that the USD has unwound back towards key pivot support around 109.30/110.00. This is a crossroads moment. We believe that a decisive breakdown below 109.00 would be a key signal of further USD corrective pressure.
Major forex at key levels
This 109.30/110.00 pivot support band on the Dollar Index equates to the USD testing key levels on several major forex charts.
On EUR/USD the key level to watch is the resistance at 1.0095. A decisive closing upside break would be a strong positive signal. We believe that a break back under 0.9960 would be disappointing for the bulls.
On GBP/USD the test is the resistance at 1.1645. Also, note the resistance of an eight-month downtrend too. Back under 1.1380 would be disappointing for the rally.
On the AUD/USD chart there has also been a decisive move higher to test key resistance. The September/October highs at 0.6520/0.6545 need to be decisively broken for a sustainable recovery. This would also break the three-month downtrend.
And finally, there is crucial support at 145.00 that is coming under pressure on USD/JPY. Given the importance of this as a breakout, losing it as a pivot support would be significant.
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