The U.S. economy is showing surprising resilience, while growth in Europe and China is slowing. The Fed is focused on curbing inflation, and this reinforces its stance of keeping interest rates in the U.S. much higher than in most countries, driving demand for the dollar.
The Fed is likely to maintain tight monetary policy over the next year. These expectations have driven Treasury bond yields to their highest level since the financial crisis of 2008, with the dollar rising against all major currencies since mid-July.
Many investors started the year expecting the dollar to drop once inflation fell, economic growth slowed, and the Fed abandoned its most aggressive interest rate hikes since the early 1980s. Instead, the economy defied the pessimistic outlook, and Fed officials made consistently hawkish comments, bringing the dollar strength index back to its highest level since last November.
In CME Group Inc.'s federal-funds futures market, which is used to wager on monthly average rate levels that the U.S. central bank sets a target range for, open interest in November contracts rose sharply on Wednesday.
Open interest, defined as the number of contracts in which traders have long or short positions, increased to almost 600,000, the highest in the market's three-decade history.
This record number represents a risk of $25 million for each basis point of rate change, with most of that amount tied to a rate hike.
Trading in futures and options markets shows that investors expect this trend to continue. According to the Commodity Futures Trading Commission, speculative traders raised their long positions on the American currency last Tuesday to the highest level since June, while asset managers pulled back their short positions to the lowest level since October.
Comments from current and former Fed officials this week seemed to boost both short- and long-term interest in November contracts. There was a new round of futures sales on Tuesday after Cleveland Fed President Loretta Mester said she would support another rate hike in November if the economy maintains its current momentum.
Although long and short futures positions are equal, the recent increase in open interest seems to reflect those that will benefit from the Fed's rate hike on November 1. Traders are making this prominent by selling November contracts.
On Wednesday, open interest increased by more than 50,000 for the seventh day in a row. Large short positions in Fed funds futures are targeting a rate hike in November.
Today, particular attention is paid to the labor market data. If the employment rate is higher than forecasted, the probability of a rate hike will be rather high, providing a strong momentum for the U.S. dollar rally to continue and the EURUSD pair to decline further.
If the change in non-farm payrolls is above 180,000, sell EURUSD.
If the change in non-farm payrolls is below 160,000, buy EURUSD.
Profit or loss is to be taken today at the end of the U.S. trading session.