2023.09.18 07:42
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Bearish positions plummet! Hedge funds shift to bullish on the US dollar ahead of the Federal Reserve meeting.

The euro weakened, coupled with the Federal Reserve's "higher and longer" tightening policy, which helps further consolidate the strong position of the US dollar. Market expectations are that central banks of various countries convening monetary policy meetings this week will mostly follow the European Central Bank, implying that interest rates have reached their peak.

The Federal Reserve's interest rate meeting is approaching, and hedge funds generally expect the FOMC to maintain a hawkish stance at this meeting, with the dollar seeing its first bullish sentiment in six months.

Data from the Commodity Futures Trading Commission shows that major hedge funds held a net long position of 18,000 contracts in the eight major currency pairs as of September 12, compared to a net short position of 25,000 contracts the previous week. Meanwhile, due to the European Central Bank's signal of an imminent rate hike, the euro saw its largest decline in bullish sentiment since January.

Until the end of July this year, hedge funds' net short position on the dollar remained at a two-year high. However, with the release of successive US economic data highlighting the strength of the economy, many institutional investors believe that the Federal Reserve will raise interest rates again later this year, and the timing of rate cuts next year will be further delayed.

The market generally expects the Federal Reserve to pause its rate hikes at the September meeting. However, the dot plot forecast suggests that the FOMC may still have a slight majority of 10 to 9 in favor of one more rate hike this year.

In addition, Wall Street News previously mentioned that 40 economists surveyed by the FT and the University of Chicago Booth School of Business generally believe that there will be at least one more rate hike this year.

Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman in New York, stated in a report:

"With US data remaining relatively strong, we believe the upward trend of the dollar will continue."

He also stated that the economies attending this week's monetary policy meeting will mostly follow the European Central Bank's 25 basis point rate hike. Meanwhile, the European Central Bank stated in its post-meeting statement last week that the current policy interest rate has reached a level that can bring inflation back to its target, implying that the rate hike process has been completed.

With the euro weakening and the Federal Reserve's "higher for longer" tightening policy, this further strengthens the dollar's position of strength, prompting hedge funds to take action.