While Jerome Powell’s second term as Fed chairman seemed more likely than Lael Brainard’s seizure of power, hedge funds chose to play it safe. How have their activities affected EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
Financial markets saluted the appointment of Jerome Powell as the Fed chairman for a second term with the strengthening of the US dollar, higher yields on Treasuries, and shares of the energy, financial and industrial sectors, while the tech giants, on the contrary, fell into a wave of sell-offs. With the new-old head of the Federal Reserve, monetary policy should be normalized, which means there is no need to hold securities with high multipliers.
Powell’s re-election seemed more likely, but investors had to hedge the risks associated with Lael Brainard’s victory. She was to focus on achieving full employment, preferring to ignore high inflation. A dovish approach could result in the greenback weakening, at least in the short run. Powell’s victory has pushed the Treasury yields up and increased the chance of the federal funds rate hike in June to 96%, as well as the chance of three rate hikes in 2022.
Dynamics of Fed rate change probability
Markets are free of extra risks and now consider the question of whether the US economy will withstand higher borrowing costs. The Fed officials seem confident that it can. Richard Clarida and Christopher Waller were joined by Atlanta Fed President Raphael Bostic, saying the Fed may need to speed up its removal of monetary stimulus. Asked if he would support ending the taper by the end of the first quarter, Bostic said he would be comfortable with the timing.
The greenback strengthening against a basket of major currencies was also possible because hedge funds were actively selling the dollar for three weeks in a row until November 16, being concerned that the Fed would maintain its ultra-easy policy. The reappointment of Jerome Powell as chairman of the central bank forced speculators to exit the shorts.
Dynamics of US dollar speculative positions
Investors are so excited about the idea of tapering the US QE in the first quarter and three federal funds rate hikes in 2022 that they completely ignore the speeches of the ECB officials, whose tone is getting more hawkish. For example, François Villeroy de Galhau, Governor of the Bank of France, notes that the ECB is determined to end its emergency bond-buying program in March and may not need to expand the APP. The Bundesbank warns that inflation in Germany can be above 6% in November.
Weekly EURUSD trading plan
Investors hear only what they want to hear. They are carried away by the idea of the EURUSD strong downtrend that ignore all positive news from Europe. This may turn out to be a mistake. After the release of the euro-area PMI data and US inflation, they could start selling off the dollar on the facts. However, the most likely reason for implementing such a strategy will be the publication of the minutes of the last FOMC meeting. I suppose the euro-dollar could find support around 1.12 – 1.122. Therefore, I would not recommend aggressive sales now.
Price chart of EURUSD in real time mode
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