Takeaway

The presenter argues the current US dollar rally is overextended, driven by market expectations for Fed rate hikes (101 bps priced by July) that are far more aggressive than the Fed has implied. While viewing the current move as corrective and expecting the dollar to weaken into year-end, citing negative December seasonality, the speaker identifies specific short-term opportunities to be long USD against fundamentally weaker currencies like the British Pound.

What the presenter said

• The Fed hiked rates for the first time in three years, signaling another hike this year. [00:06]
• A disparity exists between market pricing for Fed hikes and the Fed's current implications. [00:16]
• Persistently high crude oil prices could force the Fed to hike more aggressively due to inflationary pressures. [00:37]
• Markets are pricing in at least one more Fed hike this year, with a December hike favored. [01:14]
• The hawkish outlook has increased significantly, with 101 basis points of hikes priced by July, up from 32 points 20 days ago. [01:35]
• If these aggressive market expectations are not met, the dollar rally could peter out. [01:45]
• December seasonality shows the most negative average and median returns for the US dollar, suggesting the rally could fade towards year-end. [02:33]
• The dollar rally is currently stretched, and the presenter prefers a consolidation or pullback before rejoining the trend. [03:12]
• The speaker is overall bearish on the dollar, viewing the current move as corrective and expecting prices to roll over towards the December period. [03:35]
• Momentum has turned against the British Pound due to weaker inflation and labor data, combined with the hawkish Fed outlook. [06:26]

Trade ideas

• Instrument: USD/CHF
  • Direction: Long
  • Thesis: The pair is in a strong bullish channel with accelerating moving averages, and it represents a long dollar view without betting against a central bank.
  • Horizon: short_term
  • Conviction: High
• Instrument: GBP/USD
  • Direction: Short
  • Thesis: Momentum has turned against Sterling following weaker UK inflation and labor data, which contrasts with the hawkish Fed outlook.
  • Horizon: short_term
  • Conviction: High
• Instrument: USD/CAD
  • Direction: Long
  • Thesis: The pair has formed a higher low and has seen six consecutive bullish days, with momentum realigning with the original rally.
  • Horizon: short_term
  • Conviction: Medium
• Instrument: US Dollar Index (DXY)
  • Direction: Neutral
  • Thesis: The rally is stretched and a consolidation or pullback is preferred before rejoining the trend.
  • Horizon: short_term
  • Conviction: Medium
• Instrument: AUD/USD
  • Direction: Short
  • Thesis: Shows similar bearish patterns to EUR and GBP, but this is the least favorite short as the RBA could prove to be hawkish.
  • Horizon: short_term
  • Conviction: Low

Levels and data cited

• Price Levels:
  • US Dollar Index (DXY): Near-term target at 101, with monthly R1 resistance around 101.78.
  • USD/CAD: Reached its 1.40 target.
  • EUR/USD: 1.14 is in view for bears on lower time frames.
• Data Cited:
  • Fed Funds Futures: Pricing implies 101 basis points of hikes by July, up from 32 basis points 20 days ago.
  • DXY Seasonality (26 years): September has a 56% win rate but effectively flat average returns. December has the most negative average and median returns.

Risks and what would invalidate this

• Crude oil prices continuing to rally could force the Fed to hike more aggressively, impacting the dollar.
• The dollar's rally could end if market expectations for aggressive Fed hikes are not met.
• The bearish view on crude oil requires a complete reversal of tensions in the Middle East.
• The USD/CHF and USD/CAD rallies are stretched and could pull back.
• For AUD/USD shorts, a break above recent consolidation highs could signify a swing low is in place.