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Shocking New USD Fundamentals

November 28, 2022
Michael J. Donoghue
Shocking New USD Fundamentals

Near official as of last week, the financial world has had some stunning news to grapple with. The Federal Open Market Committee (FOMC), the policy-making body within America's Federal Reserve, revealed in their latest set of meeting minutes that they are leaning towards slowing the pace of interest rate hikes. A huge step away from recent hawkishness, one key motivating factor for this blossoming consensus is the FOMC's desire for caution, and their intent to monitor the US economy's response to this year's sequence of rate hikes. This desire for hesitancy is warranted since the effects of rate hikes typically lag, with higher interest rates for businesses and consumers often taking a while to slow demand, reducing inflation and economic activity over time. The US Dollar Index (DXY) has continued sinking lower on these shocking new USD fundamentals, testing support at the 106 level as depicted on TradingView's chart above.

However, these new developments are complicated by other crucial variables. First, the FOMC has also made it clear that they now expect the federal funds rate to peak at a level higher than their earlier expectations had reflected. In other words, in spite of near-future rate hikes likely shrinking in size, they will also likely be more frequent than previously intended, with US interest rates currently anticipated to climb higher than the FOMC had planned several months ago. This factor is quite bullish for USD at face value, though how financial markets will digest it over the coming months is difficult to say.

Second, the DXY faces peril in the form of a fresh slate of US economic data this week, including: the Conference Board’s Consumer Confidence report at 10 am ET on Tuesday tomorrow; Non-Farm Payroll (NFP) estimates, JOLTS Job Openings, and a speech from Chair Powell on Wednesday; month-over-month Core PCE Price Index numbers on Thursday at 8:30 am ET; and wage growth, NFP changes, and the new US unemployment rate on Friday at 8:30 am ET. As this flurry of new data becomes available to traders around the world, many major pair trade setups will likely emerge for both USD bulls and bears.

Three Pairs to Watch

For those who remain bullish on USD, two of the following currency pairs are viewed favorably by the EdgeFinder, and the other, USD/JPY, earns a spot on this list nonetheless due to its past potential. They are itemized below with their respective ratings, signals/biases, and corresponding charts. They could potentially yield some great opportunities for going long on USD this week, depending on how the markets react to the contents of these new batches of economic data.

1) USD/CAD - Receives a ‘4’ Rating, or a ‘Buy’ Signal

Shocking New USD Fundamentals
Shocking New USD Fundamentals

2) EUR/USD - Receives a ‘-4’ Rating, or a ‘Sell’ Signal

Shocking New USD Fundamentals
Shocking New USD Fundamentals

3) USD/JPY - Receives a ‘1’ Rating, or a ‘Neutral’ Signal (Personal Long Bias)

Shocking New USD Fundamentals
Shocking New USD Fundamentals

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