Upbeat Markets Hit the Dollar

Written on 15/11/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

A much more positive vibe has infected markets recently on the back of the softer than expected US inflation data released last week which has seen sharp position adjustment in both dollar ownership and equity indices. Traders cheered and even chest-bumped several statistical measures which showed that “peak inflation” might now be in place after many false dawns.

Revisions to China Covid policy and a possible de-escalation in the Ukraine-Russia conflict have also helped boost sentiment as we head into year end. The Xi-Biden meeting on Monday has simply added to the feel-good environment swirling around risk taking.

The fear of missing out or “FOMO” is being mentioned again on trading desks as fund managers who are knee-deep in cash holdings ponder jumping on board the bull markets we are now seeing in numerous stock indices. For example, the German Dax has gained over 20% since its lows in early October which is the classic definition of a market in bull territory.

According to data from the Bank of America, fund managers have been holding more cash than at any point since 2001. The short squeeze is powerful driver as concerns over materially underperforming this powerful bullish momentum could see more upside, especially as we enter the seasonal period of a traditional risk rally into the final trading period of the year.

Dollar Doldrums

The most crowded trade in the global investment community has undergone a severe adjustment very recently. Long dollar positions lost over 4% of its value last week and the greenback continues to struggle. Fed rate expectations have dropped dramatically since the CPI data with the peak Fed funds rate now below 5%. Numerous Fed speakers are scheduled over the coming days with policymakers expected to make it known that they do not want to make any concessions to inflation at this point.

The well-known dove Lael Brainard signalled there is more work to do while also stating explicitly that the Fed will likely shift to slower rate increases soon. The reality is that the FOMC is much closer to the end of its rate hiking cycle now with slower growth likely to emerge early next year along with a further reduction in inflationary pressures.

EUR/USD Tests 200-day SMA

The weak dollar dynamics and lower gas prices are helping EUR/USD make new cycle highs after its broke out of the long-term bear channel earlier this month. The world’s most traded currency pair is nearing key resistance, the 200-day simple moving average at 1.0427, an indicator it last touched back in June 2021.

GBP/USD also looks to have moved out of its descending channel as sterling traders eye up CPI data released tomorrow ahead of the pivotal Autumn Statement announced by the new Chancellor on Thursday. That is an event not to miss as financial market credibility will do battle with political expediency.

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