What do traders do? USD INDEX and FOMC

One of the more interesting "indicators" (I don't know if you can call it that) is the observation of index futures. We have a very interesting scale at the bottom showing the exposure of individual groups of traders - large and commercial hedgers. What does their exposure to the market tell us?

At the beginning I want to draw your attention to one thing. Namely the signal. The signal to change the trend on the USD index (and other currency futures) is the intersection of the green and red lines (hedgers and large traders' exposures).

Why is this happening?

To answer this question, let's consider what hedgers do. They hedge their positions by making an opposite transaction. So if they are exposed to Sell, they also enter into a buy transaction. To put it simply, they try to keep it as neutral as possible on the market by earning a small difference or sometimes a swap.

Therefore, if the index rises, the hedgers exposure to sell increases (they have a lot of buy transactions in their portfolio, hedging on the increases with sell positions). Therefore, as the risk of a correction increases, they start to pull out of their positions. They post a large number of Sell orders (in an uptrend). In other words, they throw out collaterals and collect the profits from the buy (profit taking + high exposure to sell). Hence, the first supply signals appear on the market due to the huge supply that is thrown by hedgers.

Watching how they hedge brings you many conclusions about medium-term currency trends.

You will probably notice the exception that was in 2017. Hedgers had a negative exposure on the downside (they should have had the opposite exposure). This may be because they did not close their buy trade in a timely manner (see big traders' exposure).

So what might happen today?

As you can see the index is currently in a very key place (strong support) hedgers have more exposure in short positions, so they use them to hedge their BUY positions. There is a good chance that on this decision the index will just strengthen (therefore the dollar will also).

The rising inflationary pressure, which is also observed today in the indices, speaks in favor of the dollar strengthening.

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