Trade Of The Week: USD Bears Mark Their Territory

Last week we questioned whether the mighty dollar would continue dominating the FX space after its shaky performance this quarter.

Our question was somewhat answered last Thursday after official reports showed annual inflation in the United States slowed to 7.7% in October. Not only was this the lowest level seen since January 2022 but well below the 8.2% figure printed in September. This development has significantly reduced the pressure on the Fed to keep raising interest rates aggressively - ultimately hitting the dollar.

The dollar fell for a fourth straight week in its worst performance since 2020, empowering bears and handing them control of the steering wheel.

As expected, the equally-weighted USD index also collapsed, dipping below the 1.2000 support level for the first time since mid-September.

Given how the fundamentals are swinging in favour of USD bears with the technicals singing a similar note, dollar weakness could become a key theme for the rest of 2022.

This could be another big week for the greenback thanks to numerous speeches from Fed officials, key US economic data, and a big announcement from Former US President Donald Trump on Tuesday. In the meantime, the trend remains a trader’s friend with the path of least resistance on the USD pointing south.

The low down…

Taking a quick look at the DXY daily chart, it is obvious that bears are back in town.

The dollar’s volatile reaction to last Thursday’s inflation data confirms how sensitive the currency remains to any information concerning inflation and rate hike expectations.

Over the past few months, the fundamental forces supporting the almighty dollar have been slowly diminishing. Initially, the greenback drew ample strength from the risk-off mood, confidence over the US economy, and bets for aggressive interest rate hikes by the Fed. Over time, these themes have changed – slowly stripping the dollar of its regal strength and dominance in the FX space.

With roughly six weeks left until the New Year, the dollar’s fortunes seem to be changing rapidly. If US economic data and dovish Fed officials fuel speculation around slower rate hikes, the dollar could find itself on a slippery decline over the next few weeks.

The week ahead…

Price action could be the primary force influencing the dollar as investors closely scrutinize speeches from Fed officials and US economic data.

There could be a burst of dollar volatility on Tuesday thanks to Donald Trump's big announcement, where he is expected to announce a second bid for re-election. Mid-week, Fed’s John Williams, and Lael Brainard will be under the spotlight. On Thursday, Fed’s Neel Kashkari and Loretta Mester speak with the US Conference Board leading index and existing home sales published on Friday. It will be interesting to see whether the pending economic reports and Fed speeches fuel or limit the dollar’s downside momentum.

Dollar bears march into the scene

The equally weighted dollar index remains under intense pressure on the daily charts. After cutting through the 1.2400 level like a hot knife through butter, prices dipped below 1.2000 for the first time since mid-September. Bears are clearly in a position of power and may drag the index lower over the next few days to weeks. The current downside momentum may send the index toward the 1.1900 support level. Below this point prices could test 1.1700 and 1.1600, respectively.  If prices can break above 1.2184, a rebound back towards 1.2400 could be on the cards.