There is a discrepancy between the market and the Fed that provides a potential opportunity and it can impact the USD. In brief, the Fed projected no Fed rate cuts this year in its December meeting. However, STIR markets are seeing the Fed making two rate cuts by the end of 2023.

This has impacted the market’s positioning on the USD with hedge funds increasing their USD short bets in the last CFTC report. Asset managers are now below the 20 percentile for their short positioning showing they are heavily skewed one way. This is helpful knowledge if they have to suddenly make a shift.

USD shorts gained again last week

The weak US Services PMI print was what sent the USD lower last week. The headline was expected to come in at 55, but the print was below the market’s minimum expectations of 52 at 49.6. The business activity component of the print was also below the market’s minimum expectations and the whole print was an aggregate miss. Ouch! This added strength to the USD bearish picture. But hold on a minute, as this is not a fait accompli for USD weakness. Powell speaks on Tuesday and key inflation data is out for the US on Thursday.

What to watch for

There are two things:

  1. Powell’s speech. If Powell is firm on the Fed’s ‘no rate cuts’ this year messaging then the USD will gain.
  2. If the US inflation data on Thursday comes in higher than the markets are expecting then the two rate cuts this year STIR market pricing will start to re-price.

Will this ‘answer the question’ as to whether the Fed or the market is correct? No, it will not. However, it will provide the next piece of the jigsaw.