Forecasts

US Dollar to Rise as Fed Talks Down Rate Cuts Amid Market Turmoil

Fundamental analysis, economic and market themes.

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US DOLLAR FUNDAMENTAL FORECAST: BULLISH

  • US Dollar gains with Treasury bonds as financial markets turn defensive
  • EP elections, OECD outlook update may recommit traders to risk-off bias
  • Running official commentary on US-China trade war remains a wildcard

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The US Dollar accelerated higher last week. A five-day winning streak marked the longest run of consecutive gains in two months, bringing the currency’s value against an average of its major counterparts within a hair of the 2019 high.

The advance ran parallel to rising Treasury bonds while the priced-in 2019 Fed policy outlook moved to a more dovish setting, signaling the markets now see a higher probability of a cut (now pegged at 75 percent). That points to haven demand against the backdrop de-risking as the impetus for gains.

The escalation of the US-China trade war stands out as investors’ top immediate concern. It compounds existing geopolitical uncertainties linked to Brexit, the European Parliament (EP) elections and growing tensions between the US and Iran. It also amplifies an existing slowdown in global growth.

USD MAY RISE AS FED TAKS DOWN RATE CUT PROSPECTS IN RISK-OFF TRADE

The week ahead will see these risks reiterated. Voting in the next crop of MEPs has been positioned as a referendum on the merits of the EU as a whole, with markets nervous as eurosceptics of every stripe angle for a greater mandate. Meanwhile, the OECD will probably downgrade its global economic outlook.

The Fed might unnerve investors further by reiterating that hopes for a lifeline from monetary policy are almost certainly misplaced in the near term. A speech from Chair Powell and minutes from May’s FOMC meeting will probably hammer home officials’ preference for a “wait-and-see” approach.

On balance, this bodes well for the Greenback. Another round of market-wide de-risking is likely to put a premium on the benchmark currency’s unrivaled liquidity, sending it higher. While yields are not the top concern in this scenario, a Fed in stasis while other central banks plan easing surely doesn’t hurt.

US-China trade talks remain a wildcard. Prices have proven to be responsive to the running commentary on negotiations from media outlets linked to the government in Beijing as well as US President Donald Trump’s Twitter account. Soundbites from either camp might inspire kneejerk volatility.

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

US DOLLAR TRADING RESOURCES

Looking for a fundamental perspective on USD ? Check out the Weekly USD Technical Forecast



Euro Braces for Volatility Ahead of EU Elections, ECB Minutes

Political economy, economic and market themes.

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EURO FUNDAMENTAL FORECAST: BEARISH

  • Europe and the Euro brace for European parliamentary elections
  • The ECB and Fed meeting minutes may mean additional volatility
  • European economic data, OECD outlook publication add to risks

See our free guide to learn how to use economic news in your trading strategy!

The Euro may be in for its most tumultuous week year-to-date as the Fed and ECB prepare to release their respective meeting minutes right before the EU holds the most consequential European-wide vote in its history. Volatility may be further enhanced after the OECD publishes its latest projections for growth and as key Eurozone economic data is released throughout the week.

On May 21, the multinational organization will publish its economic growth forecasts with expectations that the report will highlight weakness in global demand. The US-China trade war has disrupted financial markets and destabilized global growth prospects. EU-US relations are also not particularly comforting after the two global players waged an economic war against each other with a possible continuation this year.

Euro area economic data will also be released throughout the week. German GDP and Eurozone CPI will likely be the most heavily eyed pieces of data, though their impact may be overshadowed by higher-level event risk. Broadly speaking, economic data out of Europe has been tending to underperform relative to expectations and has forced the ECB to implement new liquidity provisions as a way to boost local growth.

EUR

The following day, the Fed will be releasing its FOMC meeting minutes from the most recent policy meeting. Fed monetary policy has not only impacted the US Dollar but has also roiled global financial markets because of the implication a higher-priced USD has on international economic activity. According to the Bank of International Settlements, 80 percent of all global transactions are conducted in the US Dollar.

And finally, on May 23, Europeans will cast their ballot and express their joy – or more likely, discontent –with the European Union. Preliminary polls are showing eurosceptic parties may gain as much as one-third of all seats in the European parliament. This in itself could have devastating consequences for the Euro and could undermine the stability in European sovereign bond markets.

Spanish, Italian, Greek, Portuguese 10-Year Bond Yields Spike on Italy’s Political Turmoil

EUR

On the same day, the European central bank will be publishing its minutes from the last policy meeting. Market participants are likely expecting dovish undertones as the continent continues to struggle in bringing about sustained growth and inflation. Brexit and the European elections may only add greater political risk and cloud an already-uncertain outlook as monetary authorities attempt to steer in unchartered territory.

FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

Looking for a technical perspective on the Euro? Check out the Weekly EUR Technical Forecast



Japanese Yen Q2 Forecast: A Haven in a World Which Needs One

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The Japanese Yen heads into 2019’s second quarter pushed by a rare tailwind. It spent much of the first under pressure. Global risk appetite held up rather well in the face of numerous challenges, from weakening economic data in many regions to the protracted divorce proceedings between the United Kingdom and the European Union.

However, as March bows out, it seems that that risk appetite is at last buckling.

USD/JPY Monthly Chart: Symmetrical Triangle in Place

Japanese Yen Q2 Forecast: A Haven in a World Which Needs One

Over the past three months, USD/JPY spent most of its time climbing. But, looking at a longer-term technical perspective shows that it is perhaps not yet ready to embark on its next major trend.

Looking at the monthly chart above shows a symmetrical triangle that has been taking shape since May 2015. These are typically continuation patterns. In this bullish example, USD/JPY may resume the dominant uptrend that took it from 78.00 in late 2012 to 125.00 by June 2015. Getting there involves clearing the descending resistance line of the triangle (downward sloping red line on the chart above).

See the complete Q2’19 Japanese Yen forecast as well as forecasts for the other major currencies, equities, Gold, and Oil.



Sterling (GBP) Price Outlook: Brexit Anger May Dampen Sterling Strength

Fundamental analysis and financial markets.

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As we write, the ruling UK Conservative Party have lost over 600 seats in the local elections, and if these losses are translated into a national vote, the Conservative and Labour parties will be neck and neck on 28% of the vote while Others will have 25%. UK politics look set to re-assert themselves and Sterling is very likely to suffer.

Sterling Price (GBP) Talking Points:

  • Brexit talks to continue next week against a negative backdrop.
  • GBPUSD still finding support around 1.3000.

The DailyFX Q2EUR Forecast is available to download including our short- and medium-term look at Sterling (GBP).

Fundamental Forecast for Sterling: Neutral

The outlook for Sterling remains neutral for next week in what could turn out to be a tough week for UK PM Theresa May. Thursday’s local council elections sees the ruling party lose hundreds of seats as the UK public show their displeasure at PM May’s handling of the Brexit negotiations. Talk still swirls of a possible indicative vote of no confidence in PM May, and this volume will turn higher as the local election losses are put into perspective. As we write, the current results would translate into both the Conservative and Labour Party polling 28% of the national vote with Others taking 25%, a potentially disastrous and fragile political set-up. The PM also sacked her defence secretary Gavin Williamson mid-week over, alleged, newspaper leaks concerning the Huawei and their potential involvement in the future UK 5G networks.

This week’s BoE monetary policy meeting saw all measures left unchanged but in the QIR report, governor Carney hinted that more than one interest rate hike may be needed, not an outright hawkish signal but one to take note of. The BoE increased their GDP forecasts going forward while downgrading this year’s inflation outlook before pushing it higher again for 2020 and 2021. Next Friday the Office for National Statistics will release Q1 GDP data which may see q/q growth of 0.4% to 0.5%, up from 0.2%, a healthy growth rate despite Brexit worries.

Next week commentary is scheduled from BOE members Jon Cunliffe (dove), Andy Haldane (hawk) and Dave Ramsden (dove) which may give the market some more background behind the latest BoE meeting.

DailyFX Economic Calendar

GBPUSD remains above 1.3000 despite the local election losses as investors seem reluctant to short the British Pound at current levels. While this stance has held over the past few weeks, the Brexit noise-o-meter is being turned up and has been seen in the past months, GBP reacts to tweets and ‘sources’ stories more than monetary policy. The current uplift may hold but sterner tests lie ahead around the 68.2% Fibonacci retracement level at 1.3177.

GBPUSD Daily Price Chart – May 3, 2019

gbpusd

IG Client Sentiment data show 63.7% of traders are net-long GBPUSD. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggest that GBPUSD prices may fall further.

Traders may be interested in two of our trading guides, especially in times of volatilityTraits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1

Other Weekly Fundamental Forecast:

Australian Forecast: Australian Dollar Could Face First RBA Rate Cut Since August 2016



Gold Price Outlook Fixated on Trade War Risk, FOMC Minutes

Macroeconomic trends, technical analysis and capital market alerts.

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Gold Price Outlook Fixated on Trade War Risk, FOMC Minutes

GOLD PRICE OUTLOOK – TALKING POINTS

  • Gold has potential to rebound sharply from its recent stretch of weakness if looming risks intensify
  • XAUUSD might continue to face short-term weakness from the threat of recovering risk appetite and potentially hawkish Fed minutes
  • Read about How to Trade Gold or download the free DailyFX Q2 Gold Forecast for additional insight

On Thursday we highlighted how spot gold prices dropped from a 1-month high as yields rebounded along with risk appetite. Gold faced further weakness during Friday’s trading session as short-term interest rates climbed higher along with the US Dollar in response to a robust Consumer Sentiment report. Gold was subsequently dragged lower considering American consumers reportedly feel the most optimistic in 15 years with rebounding inflation expectations – a development that may help keep Fed rate cut prospects at bay.

GOLD PRICE (XAUUSD) CHART: 1-HOUR TIME FRAME (MAY 10, 2019 TO MAY 17, 2019)

Gold

The risk that markets are overpricing the probability that the Fed cuts rates this year could weigh negatively on gold if reversed. Wednesday’s release of the latest FOMC meeting minutes could trigger traders to develop a more hawkish perception of the Fed which would threaten XAUUSD due to the prospect of higher future interest rates. This in additional to weak gold chart technicals merges with the possible further weakness in the Chinese Yuan – all of which could serve as headwinds to gold.

Although, markets will likely obsess over US China trade war developments next week which will likely fuel risk appetite. Ultimately, this looks to largely dictate whether or not gold can catch a safe-haven bid from traders fleeing risk which could push XAUUSD higher.

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter



Canadian Dollar May Be Torn Between Upbeat Local and US Econ Data

Classic technical analysis, macro and economic themes.

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CAD Price Chart

Canadian Dollar Fundamental Forecast: Neutral

  • Canadian Dollar gained as relatively dovish Fed boosted stocks and crude oil prices
  • Focus next week shifts to economic data with US-China trade deal pushed back for now
  • Both local and US economic data may beat estimates, S&P 500 might struggle to rise

Have a question about what’s in store for Canadian Dollar next week? Join a DailyFX Trading Q&A Webinar to ask it live!

The Canadian Dollar rose this past week as a relatively dovish Fed sunk the US Dollar, boosted stocks and crude oil prices. At home, the Loonie didn’t spend much time noticing a better-than-expected GDP report. Despite the beat in the YoY rate for November 2018 (1.7% versus 1.6% expected), growth was at its slowest in two years. The MoM one contracted 0.1% which was in-line with estimates.

Probabilities of a Bank of Canada hike simultaneously dropped after the cautious tone from the FOMC meeting. Overnight index swaps were pricing in a 15.9% chance of a BoC hike by July 2019, down from almost 40% confidence at the beginning of this past week. Yet, the Loonie still stood relatively strong, which speaks directly to what it was focusing in the interim: sentiment.

There has been a noticeably strong inverse correlation between USD/CAD and both the S&P 500 and crude oil since October. The latter two have spent most of January recovering as markets grew doubtful of a hawkish Federal Reserve and optimistic about a deal between the US and China to end the trade war. With an outcome on the latter being pushed back for the “near future”, the focus shifts to economic data.

After all, both the Fed and the BoC are quite data-dependent and arguably the most hawkish of the major central banks (albeit that has diminished somewhat as of late). Next week contains Canadian employment data. Economic statistics out of the country has been tending to outperform relative to economists’ expectations, opening the door to an upside surprise.

The same also holds true in the United States. As such, the first estimate of Q4 GDP and PCE core (the Fed’s preferred measure of inflation) may also surprise better. With that in mind, the Canadian Dollar fundamental forecast will look neutral. On a side note, the S&P 500 and market sentiment could be running out of room to keep rallying which may reverse gains in oil prices and bode ill for CAD down the road.

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

Other Weekly Fundamental Forecasts:

Australian Dollar Forecast - Australian Dollar Could Wilt If Focus Returns To Interest Rates



Reeling Australian Dollar Still Buffetted By US-China Trade War Storm

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Fundamental Australian Dollar Forecast: Bearish

  • AUD/USD is at three-year lows
  • Ten-year lows await close by
  • The coming week is unlikely to see a turnaround in the Aussie’s battered fortunes

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar heads into a new week with little sign of respite for its battered bulls.

The currency flirts with three-year lows against its big US brother thanks to a combination of risk factors both foreign and domestic, with a ten-year trough in sight if they give way.

The apparently ever-increasing heat of US-China trade war has taken as much out of the Australian Dollar as just about any other currency. This is understandable as the Aussie is both a general pro-growth play and, sometimes, a proxy for Chinese economic activity.

More specifically and domestically, Australian ten-year bond yields sank to new record lows last week as risk-appetite wilted and markets moved to price in a cut to the record-low 1.50% Australian Official Cash Rate between now and August. At present rate futures assign a better than 60% chance that rates will go lower next month, but an August move is now fully priced.

Some worrying details in the last labor-market report made a cut far more likely as far as markets were concerned. Job creation continued to expand in April, but full-time hiring fell, and the unemployment rate ticked upward. Given the Reserve Bank of Australia’s heavy emphasis on labor’s fortunes when setting monetary policy, it’s hardly surprising that disappointment here should weigh heavily on the currency.

It’s very hard to confidently predict any change in the Australian Dollar’s fortunes this week. Investors will get a look at the minutes of the last RBA conclave, and they’ll also hear from Governor Philip Lowe. Both are coming up on Tuesday. Neither is obviously likely to help the currency much.

Thursday will bring Purchasing Managers Index figures but, again, it seems implausible that these can turn sentiment around.

What might of course is some general revival in risk appetite linked to the trade story but that, as ever, is impossible to foresee. Based on what can be known, it’s got to be another bearish call for AUD/USD this week.

AUD

Resources for Traders

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--- Written by David Cottle, DailyFX Research

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Looking for a technical perspective on AUD? Check out the Weekly AUD Technical Forecast



NZD/USD Looks Vulnerable. How Dovish Will the RBNZ Turn Next Week?

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NZD

New Zealand Dollar Fundamental Forecast: Bearish

  • New Zealand Dollar depreciated as sentiment soured, jobs report boosted RBNZ rate cut bets
  • Next week contains first RBNZ rate decision since November, much has happened since then
  • The RBNZmay echo dovishness and concerns from other central banks, but by how much?

We just released our 4Q forecast for equities, which may impact NZD, in the DailyFX Trading Guides page

The pro-risk New Zealand Dollar turned lower last week along with a downturn in sentiment which saw the Dow Jones Industrial produce a bearish reversal pattern. Pessimism in markets occurred with worrying news regarding the US-China trade war front. US President Donald Trump noted that it is unlikely he will be meeting China’s President, Xi Jinping, before a deadline which – if passed - could trigger an increase in tariffs (March 1).

Arguably, the largest contributor to the decline in NZD/USD was a disappointing local jobs report however. The unemployment rate shot higher from 3.9% to 4.3% in Q4 2018 while the country added jobs at the slowest pace since Q1 2016. Looking at the chart below, RBNZ rate cut bets increased as the New Zealand Dollar weakened.

nzdusd

With that in mind, all eyes next week will be on the first Reserve Bank of New Zealand rate decision since November. A lot has happened since then. Most notably, the majority of developed central banks downgraded their views regarding economic projections. The most sudden shift to a more dovish stance came from the Fed as it went from expecting three hikes this year to perhaps none at all.

Closer to home, the Reserve Bank of Australia still held on to its neutral outlook on rates which initially boosted the Australian Dollar. However, Governor Philip Lowe then noted that they are no longer favoring a hike as their next move. This sent the Aussie Dollar collapsing and gives us a rather good idea of what could happen in the week ahead.

Unlike the RBA, the RBNZ has a more balanced view on monetary policy in the first place. Governor Adrian Orr noted back in November that they are not taking cuts off the table. He also noted that they envisioned rates rising perhaps in the third quarter of 2020 as it raised inflation expectations. With that in mind, the question here is how dovish will the RBNZ appear relative to expectations?

Overnight index swaps are pricing in about a 42% chance of a cut as soon as June 2019. If the central bank downgrades their economic projections but still surprises markets with leaving the door open to a hike, it could end up boosting the New Zealand Dollar. This is like what we saw with the Bank of England this past week. Keep in mind that Mr. Orr will then speak an hour after the interest rate decision. Cautious commentary that echoes the dovishness from other central banks could add weakness to Kiwi Dollar, making for a volatile day.

FX Trading Resources

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Australian Dollar Could Take Some Rest On The Road Lower



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