The Fed raised its policy rate by 50bp to 4.5% and signaled that rates will be raised to 5.25% in 2023, which is 50bp higher than forecasted in September. Investors though are not convinced the Fed will deliver…

Fed chair Powell noted that the current financial conditions was not sufficiently restrictive, and he said that they would take financial conditions into consideration when deciding on future interest rate hikes.

Fed Will they Hike More than Market Expectations

This could mean that if traders don’t change their view about excessive amount rate cuts the Fed would have to hike rates quicker. The Fed is not happy about current market pricing, but they have struggled to convince trades that rates could stay higher for longer – the market sees rates topping out at 4.9%.

So where will the USD go from here?

US Interest Rates

Interest rate expectations won’t get any worse they can only get better in our view. Also, the USD has a good yield on it even with the market's dovish view and it will get support from QT which is the removal of USD past stimulus from the Fed balance sheet. The chart below shows FOMC members expectations for the fed funds rate (blue dots) and current market pricing (red dots) with market expectations below the Fed...

The Fed's balance sheet is being reduced via QT which is where the removes USD's from circulation, and its impact on the market is similar to a rate hike of 2%. The Fed’s balance sheet reduction has been on autopilot since about midyear. In rounded figures, the Fed’s balance sheet should decline a little over $1 trillion next year. 

The USD is supported historically by a slowing global economy due to its global reserve currency status and at present the global economy faces recession 

The USD will firm if we have a stock market sell-off which we think is likely and on any escalation of geo-political tensions. We have numerous flashpoints around the World Russia – Ukraine, China – Taiwan, etc

In terms of sentiment, the market is bearish and built up a major short position which points to limited selling from here and plenty of upside as these speculators are taken out on stop. We can see speculators hold a major short position in the USD on the charts below first showing market heavily short puts on the options market second cart shows trend following CTA's heavily short

Technical Analysis

We have major support at the 104.00 level and expect the USD to push up to correct its oversold condition. Daily and monthly charts below with our views of the key levels of support and resistance.