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Weekly Forex Trading Forecast

Written by , Quantitative Strategist ; , Chief Currency Strategist ; , Currency Strategist ; , Currency Strategist ; , Currency Analyst  and , Currency Strategist
Symbol Forecast Outlook

Dollar Ready to Reverse Should FOMC, GDP Give its Consent

Dollar Ready to Reverse Should FOMC, GDP Give its Consent

Fundamental Forecast for Dollar:Bearish

  • The Dollar marked its lowest weekly and daily close in two months ahead of key event risk
  • Given how essential rate speculation has been to the Greenback’s 9 month rally, this week FOMC and GDP are crucial
  • See the 2Q forecast for the US Dollar and other key currencies in the DailyFX Trading Guides

The stage is set and the curtain is rising. The Dollar has wobbled these past weeks, but it hasn’t managed to turn its nine-month long bull trend. That is difficult to do when the undercurrent of the FX market maintains solid support for the benchmark currency. Economic potential, monetary policy course and disaster insurance premium all bolster the Greenback’s case for a medium-to-long term climb. Yet, that doesn’t render the currency infallible. Speculative appetite – as it has in equities and other asset classes – has likely overreached on the Dollar. But, what would unnerve such a comfortable trade? Heavy event risk.

There is a lot going on in the financial markets over the coming week. Subsequently, there will be a lot of crosswinds working on the consensus view for the Dollar. That said, we will likely see the market discount the influence of many of these catalysts in deference for the concentrated event risk on Wednesday: 1Q US GDP and the FOMC rate decision. Over the past year, one theme has commanded the reins of the broader FX market – divergent monetary policy views. The Fed has shifted from the world’s most accommodative central bank to one of the first majors to contemplate a rate hike. What has resulted from this shift is one of the most impressive runs the currency market has seen in a while.

The trouble for the Dollar is that the premium afforded the currency is so-far unrealized. While there is general agreement that the Fed will lift rates over the coming year, there is considerable debate as to when the actual move will be realized. At the turn of the year, speculation for a ‘mid-2015’ move was robust with meaningful support for a June or July liftoff. However, in the past three months, the hawkish mood has soured. Data has softened and fallen increasingly short of forecasts (the Citigroup Economic Surprise Index dropped to a three-and-a-half year low). Rhetoric from central bank officials in turn has also backed off a campaign to acclimatize speculators to an earlier move. Maintaining a measure of skepticism throughout, the market has pushed back its timing of a first move through Fed Funds futures from September (at the start of the year) to January 2016 currently.

Whether or not the central bank will be forced to sit on its hands will be heavily dictated by the fundamental duo Wednesday. Chronologically, the growth report for the opening quarter of the year crosses the wires first. The forecast is already calling for a significant moderation of the economy’s pace from 2.2 percent in 4Q to a more reserved 1.0 percent clip. While many – including some Fed members – believe this could be a repeat of last year where the lull is temporary, it would likely kill any lingering hope for a June move.

As for the central bank decision, this is not one of the quarterly events where we receive updated forecasts and a press conference to work our speculative assessments off of. That said, the statement will be thoroughly processed and that is where the market derived most of its interest at the last meeting. If the group’s tone is materially more cautious or concerned on the state of the economy, inflation and global conditions, it could further dovish skepticism. Of course, the most potent outcome for the Dollar would be a combined economic slowdown and softer rhetoric.

Ultimately, the Dollar’s immediate risk is that it has gorged on speculative appetite in the persistent trend alongside the tangible yield advantage. That places the currency in a position to bleed off some of its excess as the uncommitted trend-runners bail. If the cumulative US economic docket comes out better than expected, the potential impact will be materially diminished to a disappointment – an asymmetrical influence. And, while it is important to watch the key US updates as it commands global attention; Dollar traders should also keep tabs on Euro-area/Greek tensions, general risk trends and the myriad of monetary policy-sensitive events for the other majors.

EUR/USD Appeal Due to Covering Potential, Not Yield Prospects

EUR/USD Appeal Due to Covering Potential, Not Yield Prospects

Fundamental Forecast for Euro: Neutral

- The ECB press conference initially invited limited volatility, but EURUSD eventually settled higher.

- The bearish technical formation in the USDOLLAR Index portends to a stronger EURUSD.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The Euro treaded water last week, losing ground against half of its major counterparts and gaining a bit more against the other three. The worst performance came against the Swiss Franc (EURCHF -0.91%), while the best performance came against the US Dollar (EURUSD +1.87%). In a week ripe with strife – be it on the political front, with more debt bantering with Greece, or on the monetary front, in the form of the European Central Bank’s third policy meeting of the year – the Euro fared reasonably well, all things considered.

With respect to the ECB meeting, President Mario Draghi has made it quite clear that market-borne talk of the QE program being tapered ahead of its projected September 2016 finale are premature at best, and misguided at worst. Before asset purchases cease, the ECB needs to see a stabilization in both actualized and expected inflation, which haven’t happened yet: core inflation resides at a mere +0.6% y/y; and the 5y5y inflation swaps closed the week at 1.693%, right at the four-week/20-day average of 1.678%. ‘Taper talk’ probably becomes more realistic once core inflation crosses the +1.2% y/y threshold, or if the 5y5y inflation swaps move above 1.800%.

For now, the Euro remains a weak buy against a basket of its major counterparts due to its deflating yield appeal and further crystallization as a funding currency. The Euro has lost and continues to lose its appeal as a growth currency as the differential between the short-end and the long-end of the yield curve (in Germany the 2s10s spread fell to 0.347% on Friday from 0.638% on January 1) decreases; and its appeal as a funding currency increases as rates towards the long-end drop into negative territory (German yields out to 9-years are negative).

The drop in sovereign yields decreases the demand for Euros. With nominal yields falling and inflation expectations holding stable (and even slightly rising), real returns on fixed income investments are decreasing; in turn, this fuels demand for higher yielding/riskier EUR-denominated assets like equities; or forces Euro-Zone-based investors to look outside the region for opportunity – which means capital needs to be converted from Euros into foreign currencies. This is the “portfolio balancing channel” effect that ECB President Mario Draghi has been discussing since the beginning of the year.

The Euro’s appeal, therefore, is rooted in the oversized short position currently in the market, which at least in context of EURUSD, could help propel covering in the very near-term (as was seen again this past week). As of March 14, there were 212.3K net-short contracts held by speculators in the futures market, off from 215.3K a week earlier (and down from the 226.6K seen during the week ended March 31, 2015). Otherwise, market participants are viewing the drop in Euro-Zone yields as a sign that the ECB will keep rates for an extended period of time, well-beyond the projected September 2016 finish for its QE program: the Morgan Stanley ‘months to first rate hike’ index currently resides at 56.5, suggesting a December 2019 or January 2020 rate hike at the earliest. –CV

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Japanese Yen to Look Past BOJ Decision, Focus on Greece and FOMC

Japanese Yen to Look Past BOJ Decision, Focus on Greece and FOMC

Fundamental Forecast for the Japanese Yen: Neutral

  • Yen Unlikely to Find Lasting Catalyst in BOJ Policy Announcement
  • Greece Funding, FOMC Rate Decision Set to Drive Yen Price Action
  • Identify Key Turning Points for the Japanese Yen with DailyFX SSI

The Bank of Japan seems unlikely to expand stimulus at its upcoming policy meeting. Recent comments from Governor Haruhiko Kuroda suggest he sees no urgency in fighting the pullback in headline inflation played out since mid-2014. The drop played out alongside a steep slide in oil prices, suggesting weakness will dissipate once rebasing takes effect in the second half of 2015. Indeed, core inflation has been remarkably stable near the target 2 percent level for the past 12 months and price-growth bets implied in bond yields have been rising since the beginning of the year.

The policy announcement may still prove market-moving if an updated set of economic forecasts proves especially ominous, foreshadowing a larger easing effort on the horizon. Follow-through on such a development may be limited however since leading economic activity surveys have pointed to decelerating growth since January. That means only a dramatically aggressive downgrade would deliver something material enough to force a rebalancing of already priced-in expectations.

Meanwhile on the external front, potent volatility catalysts abound. The outcome of negotiations between Greece and its EU/IMF creditors at a meeting of Eurozone finance ministers and central bankers in Riga over the weekend will set the tone initially. Athens is due to present the fourth revision of a reform package designed to unlock further bailout funding.

Both sides seem vested in a successful accord. EU and IMF officials want to avoid setting a precedent for a sovereign default within the Eurozone that potentially leads Greece out of the currency bloc. Meanwhile, Prime Minister Alexis Tsipras and company surely understand that disorderly redenomination will probably compound their country’s economic woes and may cost them their jobs. On balance, the announcement of an agreement that keeps Greece afloat – even if only in the near term – is likely to boost risk appetite and weigh on the Japanese Yen amid ebbing haven demand for the safety-linked currency.

The next major inflection point comes by way of the Federal Reserve policy meeting. A rate hike seems overwhelmingly unlikely just yet, putting the onus on the statement accompanying the announcement. The central bank seemed to switch to a month-to-month guidance regime at the March sit-down. If this continues, Chair Yellen and her colleagues on the rate-setting FOMC committee are unlikely to say much beyond hinting that tightening probably won’t arrive in May.

Such a result may embolden the recent dovish shift in investors’ perceived Fed rate hike timeline. This may lead the Yen higher, considering the average value of the Japanese unit against its top counterparts has displayed an increasingly significant inverse correlation with front-end US bond yields over recent weeks.

British Pound Likely to Rally Further, but Watch these Two Key Risks

British Pound Likely to Rally Further, but Watch these Two Key Risks

Fundamental Forecast for British Pound: Bullish

An important jump in interest rate expectations helped push the British Pound to fresh two-month highs versus the US Dollar. Yet a great deal of uncertainty surrounding upcoming UK Elections could slow gains as traders prepare for potential volatility.

The coming week will be an important one for the UK and broader financial markets as national agencies release British and US Gross Domestic Product (GDP) growth figures for the first quarter, while a highly-anticipated US Federal Reserve policy meeting and Nonfarm Payrolls report will likewise drive market volatility.

Last week we argued that fundamental strength could fuel a sustained GBP reversal, and indeed recent developments suggest the British Pound could claw back further losses through upcoming trade. The key caveat is that any number of top-tier economic data releases and events in the coming two weeks could change outlook. Any large surprises out of upcoming UK GDP figures could have an especially significant impact for Sterling pairs. And the US Fed decision as well as NFPs results always threatens major moves in USD currency pairs.

The true test for the Sterling may ultimately come in the following week as there remains a great deal of uncertainty surrounding UK Elections. A sharp jump in GBPUSD volatility prices/expectations underlines the risk, and it remains especially difficult to predict the outcomes of the elections and much less implications for the GBP itself.

We remain cautiously bullish the British Pound as recent Bank of England rhetoric suggests that domestic interest rates may rise sooner than expected. Yield-seeking investors continue to favor currencies with higher rates of return, and interest rate differentials remain one of the most important drivers of exchange rate volatility. The key question is whether upcoming data and/or political uncertainty can derail what seems to be the start of a larger reversal for the UK currency.

Gold Plummets Alongside USD Ahead of FOMC- Key Support 1173

Gold Plummets Alongside USD Ahead of FOMC- Key Support 1173

Fundamental Forecast for Gold:Neutral

Gold prices fell for a third consecutive week with the precious metal off more than 2.17% to trade at 1177 ahead of the New York close on Friday. The decline marks the largest weekly loss in seven as equity markets probed fresh record highs alongside a pullback in the dollar. Bullion looks to close the week just above key near-term support with major US data on tap next week.

Heading into next week, traders will be closely eyeing key US event risk with the release of 1Q Advanced Gross Domestic Product (GDP) & the FOMC policy decision on Wednesday. Consensus estimates are calling for an annualized read of 1.0% for the first quarter, down from 2.2% in 4Q. The GDP report may ultimately fall short of market expectations as seasonal factors are blamed for the recent batch of soft data and a set of weak prints may press the Fed to carry its highly accommodative policy stance through the second-half of 2015. As such, look for the release to impact interest rate expectations with a stronger print likely to weigh more heavily on gold.

From a technical standpoint, gold broke below slope support on Friday, opening up a decline targeting the 61.8% retracement of the advance off the yearly lows at 1173 (key support). Note that a median-line extending off the monthly high converges on this level into the start of next week and we’ll reserve this region as our bullish invalidation level with a break below risking a decline back into critical weekly support at 1150/51. Interim resistance is eyed at 1191 with a breach above 1200 needed to shift our attention back to the long-side of the trade. That said, we’ll take a neutral stance heading into next week while noting that the short bias remains at risk above keys support at 1173.


Swiss Franc Opportunities Seen Beyond Breakneck Volatility

Swiss Franc Opportunities Seen Beyond Breakneck Volatility

Fundamental Forecast for Swiss Franc: Neutral

  • SNB Shocker Fuels Highest Swiss Franc Volatility vs. Euro Since 1975
  • Sharp Counter-Swing Seen Ahead if ECB Delays Launching QE Effort
  • Buying US Dollar vs. Franc Attractive After Post-SNB Turmoil Settles

The most adept of wordsmiths might be forgiven for struggling to find an adjective strong enough to describe last week’s Swiss Franc price action. A quantitative description is perhaps most apt: realized weekly EURCHF volatility jumped to the highest level since at least 1975, swelling to nearly 2.5 times its previous peak.

The surge was triggered after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” Appropriately enough, the previous historical peak in weekly EURCHF activity occurred in September 2011 when the Franc cap appeared as suddenly as it vanished. Then too, the SNB acted without warning and sent markets scrambling.

The announcement caught the collective FX space by surprise. Even the world’s top international economic bodies were apparently left in the dark. IMF Managing Director Christine Lagarde quipped that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move.Talking about it would be good, she added.St. Louis Fed President Jim Bullard hinted the US central bank was not notified either.

The go-to explanation for the SNB’s actions centers around bets that the ECB will unveil a “sovereign QE” program following its policy meeting on January 22. Mario Draghi and company finally secured a green light for large-scale purchases of government debt after the ECJ gave clearance to the similar OMT scheme devised (but never used) to battle the debt crisis in 2012. The SNB presumably scrapped the Franc cap to avoid having to keep pace with the ECB’s efforts.

Another wave of Franc volatility may be ahead next week. While markets seem all the more convinced that an ECB QE announcement is in the cards after the SNB’s about-face maneuver, a delay in the program’s implementation (if not its formulation) is entirely plausible. Securing the acquiescence of anti-QE advocates like Germany to having such an effort in the arsenal is not the same as launching it. The ECB may yet opt to wait through the end of the first quarter as it has hinted previously before pulling the trigger, sending the Euro sharply higher.

Measuring the fallout from the SNB’s actions is likely to be protracted. The full breadth of the various ripple effects will probably emerge over weeks and months, not hours and days. The Franc now looks gravely overvalued against currencies whose central banks are set to tighten policy this year, with the US Dollar standing out as particularly notable. It seems prudent to let the dust settle before taking advantage of such opportunities however.

AUD/USD to Eye March High on Less-Dovish RBA, Fed Delay

AUD/USD to Eye March High on Less-Dovish RBA, Fed Delay

Fundamental Forecast for Australian Dollar: Neutral

AUD/USD is likely to face increased volatility in the week ahead amid the key developments coming out of the U.S. economy, but fresh commentary coming out of the Reserve Bank of Australia (RBA) may continue to heighten the appeal of the higher-yielding currency as Governor Glenn Stevens appears to be in no rush to further embark on the easing cycle.

The advance U.S. Gross Domestic Product (GDP) report is expected to show the growth rate climbing an annualized 1.0% after expanding 2.2% during the last three-months of 2014, and fears of a slowing recovery may push the Federal Open Market Committee (FOMC) to further delay its easing cycle as a growing number of central bank officials adopt a more cautious tone for the region. With that said, the fresh developments coming out of the Fed’s April 29 interest rate decision may show little evidence for a June rate hike, and the near-term weakness in the greenback may turn into a larger correction should Janet Yellen and Co. show a greater willingness to carry its current policy into the second-half of the year.

Even though the RBA keeps the door open to further reduce the official cash rate, Governor Glenn Stevens may continue to endorse a wait-and-see approach next week at the Australian Financial Review Banking & Wealth Summit amid sticky price growth in the $1T economy. The unexpected uptick in the core rate of inflation may keep the RBA on the sidelines at the May 5 policy meeting and the central bank may soften its dovish tone for monetary policy as record-low borrowing costs raise the risk for housing market imbalance.

In turn, the rebound from earlier this month may spur a test of the March high (0.7987) on the back of dismal developments coming out of the U.S. economy, but the policy divergence should continue to foster a long-term bearish outlook for AUD/USD as the Fed remains on course to raise its benchmark interest rate. Moreover, the aussie remains at risk of facing additional headwinds over the near-term as the RBA retains the verbal intervention on the local currency.

New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction

New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction

Fundamental Forecast for the New Zealand Dollar: Neutral

  • New Zealand Dollar May Fall if Weak 4Q GDP Fuels RBNZ Rate Cut Bets
  • FOMC Meeting Outcome to Influence NZ Dollar via Risk Sentiment Trends
  • Identify Key Turning Points for the New Zealand Dollar with DailyFX SSI

The New Zealand Dollar managed to find support against its US counterpart after the RBNZ signaled it was in no hurry to cut interest rates at its monetary policy meeting. Governor Graeme Wheeler highlighted a range of factors underpinning strong economic growth and dismissed soft inflation readings in the near term as largely reflective of the transitory impact of oil prices. Speaking directly to the benchmark lending rate, Wheeler projected “a period of stability” ahead.

Still, the familiar refrainwarning that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data” was repeated. This makes for a news-sensitive environment going forward as markets attempt to divine the central bank’s likely trajectory alongside policymakers themselves. With that in mind, all eyes will be on the fourth-quarter GDP data set in the week ahead.

Output is expected to increase by 0.8 percent, an outcome in line with the trend average. On balance, that means a print in line with expectations is unlikely to drive a meaningful re-pricing of policy bets and thereby have little impact on the Kiwi. New Zealand economic data outcomes have increasingly underperformed relative to consensus forecast since January however. That suggests analysts are over-estimating the economy’s momentum, opening the door for a downside surprise. In this scenario, building interest rate hike speculation may push the currency downward.

The external landscape is likewise a factor. A significant correlation between NZDUSD and the S&P 500 (0.52 on 20-day percent change studies) hints the currency is sensitive to broad-based sentiment trends. That will come into play as the Federal Reserve delivers the outcome of the FOMC policy meeting, this time accompanying the statement with an updated set of economic forecasts and a press conference from Chair Janet Yellen. Fed tightening fears have proven to be a potent catalyst for risk aversion since the beginning of the month. That means a hawkish tone is likely to sink the Kiwi, while a dovish one may offer the currency a lift.