The DXY - Thought Process (Article)
The DXY's recent price action makes me wonder, are we in a phase of anger, denial or anxiety?
The $ has plunged with the markets expecting the interest rates to have reached a terminal rate and bonds sold off in anticipation.
I do agree that this is the terminal rate for a number of reasons:
1. Inflation is at 3.2% YoY - Fed targets 2%. Back in June '22 inflation YoY was at 9.1%, so indeed current rates have been doing the Fed's required job of price stability.
Increasing rates further doesn't seem reasonable at this point, unless we get very rapid economic growth and lower Unemploment numbers.
Powell: "Reducing inflation is likely required a period of below potential growth and some softening of labor market conditions"
Powell: "Data showing economic growth could put further tightening on monetary policy"
- Meaning higher for longer or another small rate hike, depending on market conditions.
2. The Federal Reserve also has a required job of achieving maximum employment. Unemployment rates have remained low since March '22, but are showing signs of weakness. Weakness has to do with many factors "rate contributions"
Powell: "Higher interest rates appear to be weighing on business fixed investments"
- Which only means: less spending --> lower inflation --> also affecting employment inflation.
Continued claims started to move up, leading unemployment.
Unemployment rates at 3.9%, if continue to increase as projected, then a recession in inevitable as predicted. The only problem with predictions or projections is your never really know how or when things will play out. Better to anticipate and react.
Powell: "Full effects of tightening are yet to be felt"
Higher for longer could be a possibility, until Unemploment reaches around 4.3% which is "recession territory" for this cycle.
Election Year:
2024 as many know is an election year for the US Presidency. Usually in election year's the SPX has a seasonal drop (doesn't have to be a recession). Also doesn't have be in the election year, could occur after. This cycle in general has way to many divergences from previous cycles, maybe it's due to the Fed being slow leading to the start of QE.
Could the seasonal drop and QE correlate though?
Let's look at different possibilities:
1. Election year's drop in SPX turns too severe. The Fed is forced to start quantitative easing, with possibly low unemployment rates. This will bring a big question mark to what could happen next? Unemployment doesn't stay too low for too long. Double drop?
2. Unemployment starts to go up rapidly before the seasonal drop and the Fed is forced to start QE, which will correlate with the seasonal drop.
3. Seasonal correction isn't too bad, Unemploment is low, inflation still high and Fed holds rates.
Powel: "Inflation remains well above the 2% goal"
It's interesting to see what will happen, as it's an election year, the Fed is "low key" forced to drop rates. What if they don't?
Reasons:
1. Inflation target not reached
2. Unemployment low
3. SPX can handle it's drop (economy expanding too hard anyways)
Powell: "Economic activity is expanding at a strong pace, well over earlier expectations"
I have this theory in mind, as an alternative possibility:
Immigration in the US has rebounded to pre pandemic levels, which fills the demand of workers. If anyone knows Trump's politics, he doesn't like immigration, because immigrants usually take job opportunities of US citizens as they are considered "cheaper labor", sadly of course.
We miss a recession in 2024 and Trump becomes President. 2025, he deports most immigrants and the unemployment sky rockets.
Trump: "If I'm elected, The US will see the biggest deportation level in US history"
Unemployment sky rockets and the recession happens in 2025 or even Q4 of 2024, as fears will play a role in increasing Unemploment.
Seasonality for DXY:
December is known be the worse month for the DXY (open to close % wise).
January is know to be the best month.
This cycle has played very different from previous cycles, so not really sure if anything different will continue to happen.
Support and Resistances levels to look for this month:
104.543 if broken and 104.746 is supported, then expect upside to come.
106.4 - 107, big R's next
If the level turns resistance and 103 fails to hold, then 101.9 next. From 101.9 we can get a bounce.
Try to make opportunities for your self with these phycology levels. I will be updating my thoughts and the DXY and other currency pairs.
DXY DXY 
EURUSD EURUSD
Stay tuned, till next time 👋
The $ has plunged with the markets expecting the interest rates to have reached a terminal rate and bonds sold off in anticipation.
I do agree that this is the terminal rate for a number of reasons:
1. Inflation is at 3.2% YoY - Fed targets 2%. Back in June '22 inflation YoY was at 9.1%, so indeed current rates have been doing the Fed's required job of price stability.
Increasing rates further doesn't seem reasonable at this point, unless we get very rapid economic growth and lower Unemploment numbers.
Powell: "Reducing inflation is likely required a period of below potential growth and some softening of labor market conditions"
Powell: "Data showing economic growth could put further tightening on monetary policy"
- Meaning higher for longer or another small rate hike, depending on market conditions.
2. The Federal Reserve also has a required job of achieving maximum employment. Unemployment rates have remained low since March '22, but are showing signs of weakness. Weakness has to do with many factors "rate contributions"
Powell: "Higher interest rates appear to be weighing on business fixed investments"
- Which only means: less spending --> lower inflation --> also affecting employment inflation.
Continued claims started to move up, leading unemployment.
Unemployment rates at 3.9%, if continue to increase as projected, then a recession in inevitable as predicted. The only problem with predictions or projections is your never really know how or when things will play out. Better to anticipate and react.
Powell: "Full effects of tightening are yet to be felt"
Higher for longer could be a possibility, until Unemploment reaches around 4.3% which is "recession territory" for this cycle.
Election Year:
2024 as many know is an election year for the US Presidency. Usually in election year's the SPX has a seasonal drop (doesn't have to be a recession). Also doesn't have be in the election year, could occur after. This cycle in general has way to many divergences from previous cycles, maybe it's due to the Fed being slow leading to the start of QE.
Could the seasonal drop and QE correlate though?
Let's look at different possibilities:
1. Election year's drop in SPX turns too severe. The Fed is forced to start quantitative easing, with possibly low unemployment rates. This will bring a big question mark to what could happen next? Unemployment doesn't stay too low for too long. Double drop?
2. Unemployment starts to go up rapidly before the seasonal drop and the Fed is forced to start QE, which will correlate with the seasonal drop.
3. Seasonal correction isn't too bad, Unemploment is low, inflation still high and Fed holds rates.
Powel: "Inflation remains well above the 2% goal"
It's interesting to see what will happen, as it's an election year, the Fed is "low key" forced to drop rates. What if they don't?
Reasons:
1. Inflation target not reached
2. Unemployment low
3. SPX can handle it's drop (economy expanding too hard anyways)
Powell: "Economic activity is expanding at a strong pace, well over earlier expectations"
I have this theory in mind, as an alternative possibility:
Immigration in the US has rebounded to pre pandemic levels, which fills the demand of workers. If anyone knows Trump's politics, he doesn't like immigration, because immigrants usually take job opportunities of US citizens as they are considered "cheaper labor", sadly of course.
We miss a recession in 2024 and Trump becomes President. 2025, he deports most immigrants and the unemployment sky rockets.
Trump: "If I'm elected, The US will see the biggest deportation level in US history"
Unemployment sky rockets and the recession happens in 2025 or even Q4 of 2024, as fears will play a role in increasing Unemploment.
Seasonality for DXY:
December is known be the worse month for the DXY (open to close % wise).
January is know to be the best month.
This cycle has played very different from previous cycles, so not really sure if anything different will continue to happen.
Support and Resistances levels to look for this month:
104.543 if broken and 104.746 is supported, then expect upside to come.
106.4 - 107, big R's next
If the level turns resistance and 103 fails to hold, then 101.9 next. From 101.9 we can get a bounce.
Try to make opportunities for your self with these phycology levels. I will be updating my thoughts and the DXY and other currency pairs.
DXY DXY EURUSD EURUSD Stay tuned, till next time 👋
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