FX Update: Will peak US dollar soon come into view? FX Update: Will peak US dollar soon come into view? FX Update: Will peak US dollar soon come into view?

FX Update: Will peak US dollar soon come into view?

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market is clearly having a hard time absorbing the Fed shift to inflation fighting from its assumed post-2018 and especially post-covid outbreak stance of forever moving to support financial markets. On a relative basis, now that the Fed has made no secret of what it is setting out to do, can the market get much more out of it actually carrying through with its intentions? In short, the risk of the US dollar rolling over may rise soon.

FX Trading focus: Fed shift risks breaking markets, USD may be nearing a top.

The drama at the weekend in cryptocurrencies looks like the latest expression of the significant adjustment we are seeing across markets to the Fed’s recent clear shift into inflation fighting mode, a move that is already seeing the withdrawal of Fed liquidity that supports the riskiest of assets. The Fed, especially in last week’s testimony to Congressional panels, has made it very clear that a political signal was delivered during the course of US President Biden’s renomination of Powell to a second term: that inflation fighting should be the paramount concern within the Fed’s dual mandate. The Fed had, of course, already begun tapering asset purchases and is now expanding its balance sheet some 25% below the rate it was doing so before the early November FOMC meeting and could be set to announce at the December 15 FOMC meeting that it will double the pace of the reduction, such that tapering is set to be complete by the end of March. The “dot plot” forecasts of the Fed funds rate for the near future will also likely receive a significant adjustment that looks far more like the market’s actual pricing of the Fed policy than it has in some time.

But looking out the Fed expectations curve, the market is struggling to see how the Fed ever gets much above 1.50% for a policy rate, as is evident in the futures pricing for short-term interest rate futures and the pricing of five-year Treasury yields at below 1.18% this morning, up from below 1.15% on Friday’s close. And while the Fed’s shift to a more hawkish stance could continue to impact risk sentiment and even trigger a further deleveraging of risky assets, I suspect the Fed shift has reached maximum momentum for now and between now and either the December 15 FOMC meeting and the turn of the calendar year or shortly thereafter we could see peak US dollar, at least versus the more liquid currencies in the G10 (EUR, JPY, maybe GBP and the traditional safe-haven CHF), if not necessarily against the smaller currencies and possibly EM, as the USD safe-haven status could continue to see these underperform if we are set for significant further deleveraging across assets.

Meanwhile, the market’s reaction to the Friday US data set was rather interesting. There, we got a November ISM Services that broke a new hole in the roof, with a record high reading of 69.1, significantly beating the former record from OCtober, no mean feat for a diffusion index in which things must improve at a faster rate for the reading to continue higher from the prior month. The Nonfarm payrolls change was far below expectations (210k versus more than 500k expected), but will likely be revised up like nearly every other month of late. Meanwhile, the Household Survey registered a massive increase, taking the unemployment rate down 0.4% to 4.2%. The pace of the falling unemployment rate is breathtaking compared to previous cycles. The Average hourly Earnings data was in lower than expected (0.3% MoM and 4.8% YoY), but was held back by a small increase of the Average Weekly Hours denominator.

AUDUSD has reached a major inflection point in this 0.7000 area, an important level back prior to the pandemic out break and since. Not sure at all that we will get anything interesting from the RBA tonight, with the bank having declared it would like to wait until the February meeting before taking any next steps on asset purchases or other guidance. Rather, risk sentiment and commodity prices are likely the key drivers here for whether this pivotal level can offer any support after the remarkable slide of late.

Source: Saxo Group

China has finally started to ease, cutting the reserve ratio requirement for banks by 0.5%, which will release CNY 1.2 trillion (a bit less than $200 billion) of liquidity int the domestic economy. The move was flagged last week and the PBOC is taking pains to tamp down on any anticipation that this represents the start of a major stimulus move and said that it will guide banks to increase support for small businesses. Chinese growth has stumbled on power shortages that have now been largely eliminated and more importantly on an aggressive policy move against the over-leveraged property sector. The Chinese economy is increasingly held back on all levels by the strict “zero tolerance” policy toward covid, which has become a mounting challenge due to the very contagious delta variant, with the omicron variant potentially adding a new twist.

Riksbank minutes show hawks getting restless – after receiving a drubbing on recent weak risk sentiment, the krona is attempting a recovery this morning on spots of more hawkish than anticipated language in the Riksbank minutes out this morning, as three of the six members are clearly getting a bit restless on the asset purchases signals for next year and want to reduce purchases more quickly. But it’s all rather incremental stuff. Yes, SEK looks cheap, but seems forever susceptible to a weak euro and weak risk sentiment – both probably need to improve before we can reverse the relative krona weakness.

Table: FX Board of G10 and CNH trend evolution and strength
The AUD and NOK are the bottom dwellers for now, with AUD particularly weak over the last five trading days ahead of the RBA meeting tonight. On the strong side, interesting to see if the CNH can maintain its outperformance now that crude oil prices have dropped and the PBOC has made its first easing move of the cycle.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Overall, the volatility as displayed in the bright volatility readings is notable, with the distinct exceptions of EURUSD and USDCNH. New developments are few and far between, save for the EUR picking up versus traditionally riskier currencies over the last week and more.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 0330 – Australia RBA Cash Rate Target 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.