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The USD has fallen back on the view the Fed will slow the pace of interest rates and the market after recent comments from Fed chair Powell expect a rate hike of 50 bps at its December meeting:

Fed Policy 

“We think the Fed still has a lot of work to do, and rather see the central bank having to hike rates to above 5% rather than stop at below 5%, as current market pricing suggests. After financial conditions have eased significantly lately, while the Fed seeks tighter financial conditions to limit inflation pressures, the central bank cannot be too happy about the recent market developments, especially the pricing of rate cuts later in 2023.” (NORDEA)

CPI Inflation Still To High 

They won't be and the Fed is likely to have to hike rates to above 5% which is well above market pricing – the idea the battle with inflation is over is not reflected in the data. US CPI still far too high even if the peak is passed according to Credit Agricole (chart 1). Market pricing of 2023 cuts may be too optimistic (chart 2)



Goods inflation has been falling all year, but the inflation is not under control until Service prices moderate. It is all about getting services inflation down. Services is 75% of the CPI and it refuses to ease. Nordea writes: "Service cost is mainly about wages, and with a still historically tight labor market, the prospects of lower prices do not look very optimistic."


Non-Farm Payrolls

Are slowing but it's not fast enough for the Fed and with job openings high against workers seeking jobs is seeing wages coming in above forecast. Strong payroll numbers will continue which puts pressure on the Fed to cool the jobs market.



JOLTS Job Openings

Job openings relative to people seeking work remain high - employers have to pay higher wages for scarce labor.


Fundamentals Long Term Bullish 

The USD has moved too far to the downside based on the inflation outlook and a perceived dovish Fed policy but there are other reasons why the USD could rise as JP Morgan summarize below:

1. A Fed pause is not a sufficient condition for USD weakness; growth outturns are relevant…

2. US recession risks are high

3. EU and China are still vulnerable

4. USD carry: higher than 56% of currencies globally, and the Fed isn’t even done hiking yet

5. G4 central bank balance sheets are forecasted to shrink at the quickest pace on record

6. Larger external vulnerabilities on FX reserve depletion…

7. larger C/A deficits, which should become a more meaningful differentiator of returns

USD Yield Differentials

The USD has a robust economy and in terms of interest rate earnings, the USD has a better yield than most currencies and it's also a safe haven.




We have speculators heavily bearish of the USD with a large number of USD short trades and expect them to get hit on stop and trigger a significant rally to the upside.



The sell-off in the USD was severe in November with the USD having its biggest fall since records began and that selling has continued into this month although we are now seeing signs of a bottom. With speculators loaded up on short positions, many with tight stops any move up in the USD is likely to be significant as speculators are hit on stop.

Technical Analysis

The key levels of support and resistance to look out for are below with our comments...



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