Senate Compromise on Government Shutdown
There is a tendency towards a dovish US Federal Reserve, contributing to limiting the Greenback’s rise. According to the CME Group’s FedWatch Tool, there is now over a 60% chance of a rate cut by December, a view bolstered by a slump in the US Consumer Sentiment Index to 50.3 in November.
US banks will remain closed for Veterans Day, leaving the USD influenced by Fed rate-cut expectations. Market focus will be on Federal Reserve speeches on Wednesday, seeking cues about future rate cuts, impacting near-term USD demand.
The US Dollar is the official currency of the US and is used widely globally, accounting for over 88% of foreign exchange turnover. Monetary policy by the Federal Reserve, which involves adjusting interest rates, significantly impacts the Dollar. Quantitative easing weakens the USD, while quantitative tightening strengthens it.
Outlook for the USD
We see the US Dollar Index struggling around the mid-99.00s, suggesting a bearish trend is taking hold for the coming weeks. The primary driver is the market’s strong expectation of a dovish Federal Reserve, with fed funds futures now showing a greater than 60% probability of a rate cut in December. This sentiment favors derivative strategies that profit from a falling dollar, such as buying put options on USD-tracking funds or shorting dollar futures contracts.
The recent end to the prolonged government shutdown creates significant uncertainty, as we now await a flood of delayed economic data to assess the damage. Historically, we saw the 35-day shutdown in 2018-2019 reduce quarterly GDP growth by an estimated 0.2%, and the fallout from this recent closure could be similar. Until we see the delayed retail sales and jobs numbers, traders are likely to view any dollar strength as a selling opportunity.
The plunge in the University of Michigan’s consumer sentiment survey to 50.3 is a major red flag, bringing the index near the historic lows of June 2022. This weak consumer confidence gives the Fed a clear justification to continue its easing cycle and cut rates further from the current level. We will therefore be watching Wednesday’s speeches from FOMC members very closely for any confirmation of this dovish path.
Given this outlook, we are positioning for continued dollar weakness by going long on currency pairs like the EUR/USD. The European Central Bank has signaled a more hawkish stance compared to the Fed, creating a policy divergence that could propel the pair higher from its current trading range. We are also considering long positions in the AUD/USD, as a Fed rate cut could boost global risk sentiment and benefit commodity-linked currencies.
