DXY (UD dollar-index) Technical Wedge + Fundament Analysis

The middle of December offers another busy economic calendar for the US economy. While there are just three "high" rated events in the coming days, a deluge of "medium" rating releases will keep event risk on the radar from Tuesday through Friday. After the communications embargo period ends at the end of the week, Federal Reserve policymakers' remarks will resume. Consistent with its dismal December seasonal trend, the US dollar (through the DXY Index) moved down during the second week of the month. The DXY Index fell -0.11 percent last week and is presently up +0.18 percent in December. EUR/USD, the DXY Index's biggest component, gained 0.9%. GBP/USD rates rose by 0.27 percent, while USD/JPY rates rose by 0.50 percent. The commodities currency trio was the week's biggest mover. USD/CAD rates declined by 0.87 percent, while AUD/USD and NZD/USD rates rose by 2.49 percent and 0.71 percent, respectively.


The November US producer pricing index (PPI) will be announced on Tuesday, December 14, delivering another set of inflation statistics.

• On Wednesday, December 15, the morning will contain weekly US MBA mortgage applications, November US retail sales, October US business inventories, and the December US NAHB housing market index. The afternoon will include the December Fed meeting, during which a new Summary of Economic Projections (SEP) will be presented, Fed Chair Jerome Powell's press conference, and October US net long-term TIC flows.
  
  
  
• On Thursday, December 16, all of the important economic data points are coming either before or after the start of the US cash equities session. Weekly US unemployment claims are coming, as with November US construction permits and November US home starts. The December US Philadelphia Fed manufacturing index and November US industrial output numbers are also scheduled for release. Finally, the December US market manufacturing PMI will be released.
  
  
  
• On Friday, December 17, Fed Governor Christopher Waller will deliver a speech as the first Fed policymaker to speak after the communications ban is lifted. Based on the data collected thus far for 4Q '21, the Atlanta Fed's GDPNow growth prediction is now +8.7 percent annually. The revised projection comes as "the nowcast of the contribution of inventory investment to fourth-quarter real GDP growth climbed from +1.51 percent to +1.59 percent."
  
  
  
• The next update to the Atlanta Fed GDPNow growth prediction for 4Q '21 is expected on Wednesday, December 15, following the release of US retail sales and inventory data. By assessing the difference in borrowing costs for commercial banks over a certain time horizon in the future, we may determine if a Fed rate rise is priced in using Eurodollar futures.The difference in borrowing costs – the spread – for the December 2021 and December 2023 contracts, which may be used to predict where interest rates will be in December 2023. By comparing Fed rate hike odds to the US Treasury 2s5s10s butterfly, we can determine whether or not the bond market is moving in a manner comparable with what happened in 2013/2014 when the Fed announced its plan to taper its QE program. The 2s5s10s butterfly examines non-parallel movements in the US yield curve, and if history is correct, intermediate rates should climb quicker than short-end or long-end rates.
  
  There are 146.75 basis points of rate rises discounted through the end of 2023, while the 2s5s10s butterfly is just off its largest spread since the Fed taper chatter began in June (and its widest spread of all of 2021). Rates markets are now pricing in a 91 percent likelihood of five 25-bps rate rises over the next two years, unchanged from before to Thanksgiving, when Fed Chair Powell's more hawkish language appeared. To accomplish such a rate liftoff, the Federal Reserve will most likely need to begin raising interest rates by mid-2022. As a result, consistent with comments made by Fed Chair Powell and incoming Fed Vice Chair Lael Brainard, it appears more likely than not that the FOMC will announce an accelerated timeline to taper its QE program, increasing the rate of tapering from $15B/month to $30B/month beginning in January 2022. This would bring the Fed's QE program to a conclusion in March 2022, allowing for the first 25-bps rate rise in June 2022. Historically, the combination of decreasing US Treasury yields – particularly when intermediate rates surpass short-end and long-end rates –and increasing Fed rate rise probability has resulted in a good trading environment for the US Dollar. Finally, according to the CFTC's COT for the week ending December 7, speculators reduced their net-long US Dollar bets to 34,867 contracts from 35,841 contracts. Net-long US Dollar posture has remained at its highest level since October 2019, when the DXY Index was trading over 98.00.