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US Dollar: The Dollar Knows the FED is a Puppet During an Election Year

Barchart - Fri Feb 9, 4:04PM CST

After two FOMC interest rate decision meetings and dangling a carrot in front of the markets with comments of much lower rates this year, the US Dollar continues its rally off the December lows. This proves again that central banks are not more significant than the markets. Chairman Powell's recent press conference resembled a puppet show more than a Central Bank press conference. On one arm was the string being pulled by the current administration to lower rates and create a facade of security for voters wishing to use credit. On the other arm were members of the FED with their divided views on where rates should be. To be fair, the FED has been a puppet for both parties in recent years. 

During the January FOMC meeting press conference, a reporter asked the Chairman if he was concerned about the possibility of not being reappointed if the Republicans win the election. His reply was not very convincing; his primary focus was on the economy and not being reappointed. 

What surprised me is how gullible the equity markets are and how they are making all new highs. Well, at least the "Magnificent 7" are. Time will tell if there is too much optimism about multiple rate cuts this year. 

CMEGroup Fed Watch Tool 

In a recent article for Barchart, "US Dollar: Will the US Dollar Surprise to the Upside Soon?" I reflected on how market participants were enthusiastic about a rate cut at the March meeting. Only to be squashed when the data points did not support such an idea. The May meeting had similar expectations of a rate cut but recently has changed to about an even chance of either higher or stay the same rates. 

Source: CMEGroup Exchange 

As of this writing, the chances of a rate cut have increased 8% from a month ago. Meanwhile, the no rate change has risen by 34%. Longer-term Treasury yields continue to climb as investors demand better returns for holding these securities. 

This week's recent Treasury auction saw yields on both the 10 & 30-year Treasuries demand higher yields to absorb the auction supply. The Treasury recently reported that they will not have to increase the amount of Treasuries auctioned this year. If yields had to rise at an auction with fewer issuances, imagine how much yields would have to grow to eliminate more supply. Have they looked at the national debt recently? Perhaps they forgot inflation is still running well above the FED target rate of 2%. Of course, what better time to appease voters than during an election year? 

Commitment of Traders (COT) Report 

Source: Barchart 

Commercial interest (red line) continues with a more bullish posture even after the rally off the December lows. The commercial traders are net short, but their position shows they are the least bearish than at any time in the past 52 weeks. Another positive is the recent December low, higher than the August 2023 low, where commercials again began building a bullish posture. 

Technical Picture 

Source: Barchart 

When I wrote the recent article, the US Dollar was still in a two-week trading channel. One day before the upside breakout, there was a head fake close outside the channel, but it quickly reverted to the upside, where the current trend remained up. 

The US Dollar may need to correct some of this breakout momentum trading, and returning to the top of the prior channel may offer support to refuel the bull's push to the upside. 

Seasonal Pattern 

Source: Moore Research Center, Inc. (MRCI) 

After a sideways style of trading in January, the US Dollar has historically had a significant rally in February. The previous technical chart shows the break out from the January sideways channel and appears ready to resume the 2024 rally. 

Source: MRCI 

In the mentioned article for Barchart, I wrote, "An interesting seasonal correlation exists between the US dollar rally in February and the yield on the 10-year Treasury Note rally from February to the end of March. The US Government must issue more debt to raise cash for income tax refunds by the April 15 tax deadline. Higher yields - stronger dollar is a typical market correlation." The chart below shows how the yields have risen since New Year started, closely following the 10-year yield seasonal pattern. Higher yields are usually bullish for the US Dollar and should add a tailwind to its rally. 

It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.

Source: Barchart 

In Closing 

For many years, there was a trader's axiom, "Don't fight the FED!" Unfortunately, their reputation as a market leader has a horrific track record recently. They have been behind the curve for several economic pivots. Traders should be aware the market is the master we should all listen to. Trust the price trend, not the FED. 

The coming months will be interesting if the FED continues to pause on rates and the equity market is pricing in so many rate cuts. Time will tell, but it seems something has to give.

More Interest Rate News from Barchart

On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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