Exchange
rates are changing chaotically this week with the U.S. Dollar index (DXY) is
losing 0.2% with the mixed trading of the Greenback. The American currency has
weakened against the Euro by a marginal 0.2%, standing at 1.07880. Its
performance against the British Pound and Canadian Dollar remains relatively
unchanged, while experiencing a 0.4-0.5% decrease against the Australian and
New Zealand Dollar. Conversely, the Greenback has strengthened against the Yen
by over 0.5%.
These erratic
movements could be attributed to the nervousness ahead of the Federal Reserve’s
(Fed) meeting on Wednesday. The robust U.S. labor market report for November
tempered bullish expectations among stock investors. The report revealed a drop
in unemployment to 3.7% from 3.9%, Nonfarm Payrolls rising to 199,999,
surpassing expectations of 180,000. Even average hourly earnings edged up by
0.4% MoM, compared to the consensus of 0.3%.
The CME
FedWatch Tool indicated a decrease in bets on a 0.25% rates cut by the Fed in
March to 42.0% from 43.2% on Monday, a logical response to a resilient labor
market and enduring inflationary risks. However, the following day saw these
bets surge to 47.4%, seemingly without any clear reason. The U.S. debt market
remained mostly unchanged, with benchmark 10-year Treasuries yields hovering
around 4.20%. In contrast, the S&P 500 broad market index enjoyed a 0.5%
rally, reaching 4632 points, the highest since March 29, 2022.
Investors
appear to have adopted an optimistic outlook due to the rising S&P 500
index. Otherwise, there are few major explanations for this, as there are fewer
reasons for the Fed to cut interest rates amid a resilient American economy. It
is plausible that we are witnessing a classic bullish trap, wherein significant
players manipulate exchange rates in one direction to maximize profits after
the Fed decision is released.
However,
capital flows into the ETF WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU)
do not align with this narrative. The ETF experienced its largest capital
outflows in the last 10 weeks despite a stronger U.S. labor market. Such
substantial exits confirm the increasing likelihood of Fed Fund rate cuts in
March. Consequently, investors believe in a stock market rally and a weakening
of the Greenback.
The technical
picture does not currently support the idea of a weakening Greenback. Instead,
the U.S. Dollar is following an ascending formation. Nevertheless, signs of the
dollar running out of steam have emerged in the last 10 days. Technical
opportunities for a weaker Dollar may materialize in the second half of the
week, potentially allowing the EURUSD to rise towards 1.08500-1.08800 or even
higher, reaching 1.10170.
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