Senate Compromise on Government Shutdown

The US Federal Reserve appears to be leaning towards a less aggressive stance, which is limiting the rise of the US Dollar (USD). The CME Group’s FedWatch Tool indicates there is now over a 60% chance of a rate cut by December. This belief is strengthened by a drop in the US Consumer Sentiment Index to 50.3 in November. US banks will be closed for Veterans Day. As a result, the USD will be influenced by expectations of a Fed rate cut. This week, everyone will be paying close attention to speeches from Federal Reserve officials on Wednesday for hints about future rate cuts, which will affect the short-term demand for USD. The US Dollar is the official currency of the United States and is widely used worldwide, making up over 88% of foreign exchange turnover. The Federal Reserve’s monetary policy, which involves changing interest rates, greatly impacts the value of the Dollar. When the Fed practices quantitative easing, it weakens the USD, while quantitative tightening strengthens it.

Outlook for the USD

We expect the US Dollar Index to struggle around the mid-99.00s, indicating a bearish trend in the coming weeks. A key factor is the market’s rising expectations of a dovish Federal Reserve, with futures now predicting over a 60% chance of a rate cut in December. This creates opportunities for trading strategies that succeed when the dollar falls, such as buying put options on USD-linked funds or shorting dollar futures contracts. The recent end to the lengthy government shutdown has created a lot of uncertainty. We are now waiting for a wave of delayed economic data to understand the impact. In the past, the 35-day shutdown from 2018-2019 led to a decline in quarterly GDP growth by an estimated 0.2%, and the effects from this latest shutdown could be similar. Until we see the delayed retail sales and job numbers, traders may interpret any strength in the dollar as a chance to sell. The drop in the University of Michigan’s consumer sentiment survey to 50.3 is concerning, bringing the index close to the historic lows recorded in June 2022. Weak consumer confidence gives the Fed solid reasons to continue easing and lower rates further. We will pay close attention to Wednesday’s speeches from FOMC members for any confirmation of this dovish direction. Given this outlook, we are preparing for continued dollar weakness by taking long positions on currency pairs like the EUR/USD. The European Central Bank has indicated a more aggressive position compared to the Fed, creating a gap in policy that could push the EUR/USD higher from its current range. We are also looking to go long on the AUD/USD. A Fed rate cut could improve global risk sentiment and be beneficial for currencies tied to commodities. Create your live VT Markets account and start trading now.

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