US DOLLAR

FORECAST:
Q1 2022
JOHN KICKLIGHTER, CHIEF STRATEGIST, JAMES STANLEY,
SENIOR STRATEGIST

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Table of Contents
Dollar's Hawkish Path Is Not Necessarily a Bullish One in Q1 ..................................................... 3

The Monetary Policy Depth Charts....................................................................................................... 3

Adding Risk Trends to the Mix .............................................................................................................. 6

External Risks That Aren't Central Bank Anchored ............................................................................ 8

King Dollar’s Test Atop the Throne ............................................................................................ 8

USD Breakout Runs to a Big Zone – and Holds ................................................................................... 9

Q1 2022 Forecast for the US Dollar: Bullish...................................................................................... 11

Disclaimer .................................................................................................................................13

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Dollar's Hawkish Path Is Not Necessarily a Bullish

One in Q1
The US central bank announced a significant shift in its monetary policy stance to end 2021, but
the ultimate impact of the more hawkish bearing seemed to barely register for the Dollar and risk
assets in general. If we were to take the lack of direction of this systemically important shift at face
value, it would be easy to interpret that some other fundamental consideration is directing the
Greenback - or that we have simply disengaged from economic and financial currents altogether.
However, it would be short-sighted to believe that some of the most influential winds in the market
no longer matter. Anticipation bolstered by forward guidance certainly helped to soften the blow
of the late news, but thinned liquidity was arguably the most distortionary aspect. As we move into
2022, markets will fill back out and the Fed will find itself near the hawkish end of the pack. So
what course will the Dollar follow into the new year?

The Monetary Policy Depth Charts

As we enter a new trading year, we also seem to be transitioning into different monetary policy
waters. While there are still some very notable doves among the major central banks (such as the
European Central Bank and Bank of Japan); the majority are tapering, projecting near-term rate
hikes or already lifting their benchmarks. That backdrop is important because it gives context of
relative value. Were it only the Federal Reserve that were on course to raise rates while other major
peers were static or easing, there would be a distinct carry advantage to the Greenback? That is,
of course, a favourable tail wind so long as the post-pandemic risk appetite run carries over
uninterrupted into the new year. As it stands, some of the currencies that have enjoyed a carry
advantage to the Dollar in the past - including the British Pound, New Zealand Dollar and Canadian
Dollar - once again hold a current and forecasted yield premium, yet this is also where the Dollar
has gained traction more aggressively over the final two months of the past year.

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Chart 1: Relative Monetary Policy Stance

– From John Kicklighter

Forecasts carry more weight in future movement than do current yield differences. This represents
a greater downside risk for the US Dollar through the first three months of the year. At the
December 15th FOMC rate decision, the policy statement announced the accelerated pace of
taper ($30 billion per month) which would bring QE to an end by end of March, while the summary
of economic projections (SEP) raised the forecast for rate hikes in 2022 to three 25 basis point
hikes. That is modestly more aggressive than what the market was expecting the central bank to
adjust to - from a single 25 bp hike in September - so there is perhaps a little more upside on this
fundamental dimension moving forward. However, a further acceleration of rate forecasts is
improbable without it representing alternative issues. If the Fed is hiking at a pace faster than three
hikes over the span of 9 months, if we consider the first move comes after the end of taper, is fairly
aggressive with the state of economic uncertainty. Such a move would likely only come in an
environment where other central banks are raising under similar duress from inflation, which would

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temper the carry potential. Alternatively, if financial pressures build and the US central bank
throttles back its forecasts, it would likely lead to a significant loss of altitude for the Greenback.

Chart 2: US Rate Change Forecast Implied from 2022 Fed Funds Change
- Daily Timeframe (August to December 2021)

Source: TradingView; Prepared by John Kicklighter

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Adding Risk Trends to the Mix

There has been a shift in the monetary policy tempo through the second half of 2022 for a reason:
inflation has proven more persistent than authorities had bargained for. While there are those that
view inflation only in what it means for central bank policy, it is important to remember there are
very real-world economic implications. The rise in costs of goods at the wholesale, business and
consumer level throttle economic activity. If the slowdown in recovery is too sharp, it can readily
compound the existent concerns floating around the market and the rich level of the markets at
large, in turn leading to a market retreat. As a carry currency, the Dollar has a lot of ground to lose
after the Dollar's charge through the second half of this past year. For those that have traded
through more extreme market periods, a bearish view of the US currency during risk aversion may
seem counter to everything the textbooks suggest; but the Greenback is more appropriately a
haven of last resort. If we slide into a period of 'risk off' that encompasses the entire financial
system, then the Dollar may resort to its more rudimentary role. Otherwise, treat it as a risk asset.

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Chart 3: DXY Dollar Index Overlaid with VIX and 20-Week Correlation (Weekly)

Source: TradingView; Prepared by John Kicklighter

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External Risks That Aren't Central Bank Anchored

With the Dollar's safe haven status in mind and a shift in focus from localized monetary policy, there
are other matters that Dollar traders need to contemplate through the opening run of 2022. The
complication of the impending US debt limit is a deadline that keeps resetting. After another last-
minute delay, threat of an unthinkable US default has shifted to the first quarter of 2022. In all
likelihood, the government will find enough support for another delay, but the markets will never
doubt this move. More uncertain is the situation with the newest wave of the coronavirus. The
omicron variant has seen a resurgence in infections on the coast while certain countries across the
ocean have already acted to shut down their economies to halt the spread. Will US officials be
forced to eventually follow a similar solution?

King Dollar’s Test Atop the Throne

For a year in which the USD spent much of the outing in a range, it was a great year for US Dollar
volatility.

The currency came into 2021 with a full head of steam in the bearish trend. A major level had come
into play around the 90.00 handle, which was confluent with a Fibonacci level plotted at 89.92.
This is the 38.2% retracement of the 2001-2008 major move. It stalled the sell-off in December
2020 and as the door opened into 2021, a continued grind at this level in January led to a lift in
February and March.

That lift was very much driven by the prospect of the reflation trade, punctuated by hope that
vaccines would bring on an eventual end to Covid and allow us all to go back to living our lives. Well,
that didn’t happen, and in Q2 that bullish flare deflated in the USD and price action made a trip
right back to 89.92 Fibonacci support, which held the lows in May.

Another lift began to develop ahead of the Q4 open, however, as the Fed finally started to signal a
higher rate regime on the way, largely in response to inflation that still hasn’t tamed. This drove
price action all the way up to the 38.2% retracement of that same major move, and as we sit just a
couple of weeks away from New Year’s Day, 2022, that price is helping to hold near-term support
in the USD.

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Chart 4: US Dollar Index (DXY) – Monthly Timeframe (2001 to Present)

Source: TradingView; Prepared by James Stanley

USD Breakout Runs to a Big Zone – and Holds

That bullish theme in the US Dollar was very loud in Q4, and it even got its start ahead of the actual
open. As I had highlighted in the Q4 forecast, there was an ascending triangle formation in the US
Dollar, which pointed to bullish breakout potential.

That breakout hit shortly after the September FOMC rate decision, the point at which the bank
started to forecast rate hikes for next year. That gave the initial break but what seemed to do a lot
of the pushing was inflation data that just continued to grow throughout the quarter. This drove
the USD up to a fresh 2021 high until, eventually, price action found a confluent zone of Fibonacci
levels running from the 38.2% retracement looked at above, up to the 96.47 level, which is the
23.6% Fibonacci retracement of the 2017-2018 major move.

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That price was also the final target from the Q4 technical forecast and as we near the 2021 open,
and it’ll likely remain in the picture as we move into 2022 trade.

From the weekly chart we can see where price action put in a series of dojis near that confluent
spot on the chart. That’s a massive amount of indecision after a really strong run. Normally, a doji
showing at a key resistance level after a really strong run would favor pullbacks, but the fact that
price hasn’t pulled back yet despite multiple weeks of equalized price action in this tight area is, in
and of itself, deductively bullish. That means that there are buyers defending the line-in-the-sand,
and this is one of the reasons that the Q1 Technical Forecast for the US Dollar is set to bullish.

Timing that theme may be a challenge, however, as a pullback cannot be ruled out. The question
then is, even if a pullback does show, is it likely to unsettle the bigger picture trend? I don’t believe
that to be the case, and there’s even an ideal area for that pullback to move towards, and this would
be the 38.2% retracement of the 2020-2021 sell-off move. This was also a spot of resistance that
came into play shortly after that Q4 breakout but, as yet this spot hasn’t been tested for support.
A pullback to this level around 94.47 can keep the door open for continuation.

On the topside, breakout potential remains at the recent highs and how soon this shows will likely
be determined by just how strong inflation data remains in early 2022 trade.

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Chart 5: Dollar Index (DXY) – Weekly Timeframe (June, 2018- Present)

Source: TradingView; Prepared by James Stanley

Q1 2022 Forecast for the US Dollar: Bullish

The technical forecast for the US Dollar will remain at bullish for Q1, 2022. And the reasons for this
aren’t entirely technical, as the fundamental backdrop is, in my opinion, too compelling to ignore.

A major part of the US Dollar price is the Euro, which constitutes more than 57% of the DXY quote.
So when looking at USD projections it’s important to incorporate the Euro. And the divergence
showing between the two economies seems too profound to allow for continued range.

But, as the USD ran into this major area of confluent resistance, EUR/USD has pushed down to a
major area of confluent support – so the matter will likely need a push before fresh highs can be
established in the USD or fresh lows in EUR/USD. I think this push can emanate in one of two ways:
Either inflation in the U.S. remains so high that the trend breaks from fundamental driver. Or, the
US Dollar retreats to support at 94.50 as EUR/USD pushes for resistance around 1.1448-1.1500,
at which point the bigger picture trend can avail itself with USD-strength and EUR/USD-weakness.

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For support potential in USD, the 38.2% retracement of the recent bullish trend lines up at 94.11,
and this can be combined with the 94.47 level to create a ‘zone’ of potential support to look to for
bullish continuation scenarios.

Chart 6: Dollar Index (DXY) – Daily Timeframe (May, 2021- Present)

Source: TradingView; Prepared by James Stanley

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