Fundamental analysis

DXY: November Fed meeting and dollar outlook

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The dollar finished last week on a negative note. The DXY index ended last Friday in the red zone for the second consecutive week, although there were no strong drivers to weaken the dollar. Moreover, very positive macro data were published last week, which could not weaken the dollar in any way. Thus, preliminary data published on Thursday showed that US GDP grew in the 3rd quarter by 2.6% (on an annualized basis). At the same time, real exports of goods and services grew by 14.4% in the 3rd quarter, while real imports fell by 6.9%. This shift improves the performance of the US foreign trade balance.

Even though the price index, released also on Thursday, fell from 9.1% to 4.1% in the third quarter, consumer prices are still too high for the Federal Reserve, economists say.

The core PCE price index, which is the Fed’s preferred measure of inflation, rose to 5.1% (year-on-year) in September from 4.9% in August. In the 3rd quarter, the underlying PCE rose by 4.9% (in annual terms). The rate of inflation (apart from the state of the labor market and GDP) is important to the Fed in setting the parameters of its monetary policy. Rising prices put pressure on the central bank to tighten its policies and raise interest rates.

Published on Friday, the final release of the survey by the University of Michigan pointed to continued high consumer confidence in the US.

At the same time, the US labor market continues to be strong, while the unemployment rate is at its lowest pre-pandemic levels, amounting to 3.5% (in September). By the way, the latest data from the US labor market for October will be published this Friday.

Everything indicates that at the meeting, which starts tomorrow, the FOMC will continue to tighten monetary policy. Most economists expect another 75 bps rate hike.

And yet, the dollar fell in the past and preceding weeks, despite the expected increase in the interest rate in November and the same in December (according to a survey conducted by Bloomberg on October 20, 2022, the market currently estimates the probability of a Fed rate hike by 75 bps in December at 88%).

Economists say that the combination of high inflation, which reduces the purchasing power of the population, and an aggressive pace of monetary tightening will lead to an economic recession starting in the second quarter of 2023. To raise the interest rate further in a recession is suicidal for the economy. And, probably, strategic investors who make trading plans with long cycles are already beginning to prepare for at least a slowdown in the Fed’s tightening cycle, and at most for the reverse process, i.e. to the easing of monetary policy in the United States.

In the meantime, this is a matter of more or less distant prospects, the DXY dollar index maintains a positive trend.

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At the time of release of this article, the DXY dollar index (in the MT4 trading terminal the dollar index is reflected as CFD #USDX) is near 111.00, in the lower part of the range formed between the local support and resistance levels of 114.74 and 109.37. At the same time, the general upward dynamics of the dollar remains, pushing the DXY index towards more than 20-year highs near 120.00, 121.00. The breakdown of the local “round” resistance levels of 114.00, 115.00 will be a signal that the DXY index will return to growth.

Support levels: 111.00, 110.65, 109.60, 106.90, 105.20

Resistance levels: 111.31, 112.00, 113.00, 114.00, 114.74, 115.00

Trading Recommendations

Dollar Index CFD #USDX: Sell Stop 110.40. Stop Loss 111.40. Take Profit 110.00, 109.60, 106.90, 105.20

Buy Stop 111.40. Stop Loss 110.40. Take-Profit 112.00, 113.00, 114.00, 114.74, 115.00

The material has been provided by InstaForex Company – www.instaforex.com


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