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US Dollar (USD) Weekly Forecast: Fed to Confirm Interest Rate U-Turn

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US Dollar (USD) Talking Points

  • Wednesday’s FOMC meeting will decide the US dollar’s short- and medium-term direction.
  • US dollar should remain ‘the cleanest shirt in the dirty laundry basket’.

Q2 2019 USD Forecast and Top Trading Opportunity

Fundamental Forecast for the US Dollar: Neutral

The DailyFX Economic Calendar covers all market moving data releases and events.

I remain Neutral on the US dollar in the week ahead as the latest FOMC meeting looms. While a 0.25% rate cut is fully priced-in for July, and should be fully signposted next week, the USD may well hold its value against its G7 counterparts who are suffering their own bouts of weakness. Saying that, expectations of a Fed policy U-turn are running high and any disappointment Wednesday may have an out-sized effect.

The FOMC monetary policy meeting on Wednesday is likely to see Fed Chair Jerome Powell indicate the start of monetary easing in the US with the first 0.25% interest rate cut likely in July or September at the latest. In recent weeks Powell has shifted his language on rate cuts from being ‘patient’ to now ‘closely monitoring’ economic conditions, leaving the central bank maximum flexibility to slash rates. Next week’s meeting is expected to confirm market expectations that rates will be lowered in July, followed by one, or maybe two, further 0.25% interest rate cuts during 2019.

DailyFX senior currency strategist John Kicklighter will be covering the FOMC Decision Live on June 19 from 17:45 GMT

Political and trade tensions will also be closely watched next week with the US-China trade dispute unresolved, while the latest attack on two oil tankers in the Gulf of Oman threatens to escalate tension between the US and Iran, with neither side giving an inch at the moment. The Fed has already highlighted that ongoing global trade disruptions may well dampen growth in H2, confirming the need for maximum flexibility on the timing of US rate cuts.

The US dollar, while off its recent two-year high, has not broken decisively lower. While currencies normally fall before and during a rate cut cycle, the US dollar has benefitted from weakness seen in other G7 currencies. The Euro continues to edge lower as expectations grow of further monetary loosening, while Sterling continues to fear a No-Deal Brexit, especially now that Brexiteer Boris Johnson looks likely to take over from caretaker PM Theresa May.

USD Daily Price Chart (August 2018 – June 14, 2019)

USD

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

What is your view on the US Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.



Euro at Risk as the ECB Sets Up for a Dovish Policy Trajectory

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EURO FUNDAMENTAL FORECAST: BEARISH

  • ECB Forum likely to establish a dovish direction for forthcoming policy
  • EU leaders will probably pick status-quo replacement for top ECB job
  • Cross-currents from the US and the UK bode ill for the single currency

Did we get it right with our latestEuro forecast? Get it free to find out!

The Euro faces a decisive week ahead despite the what looks to be a relatively muted homegrown economic data docket. Regional policymakers are due to make several key regional strategy decisions, while the external front offers ample scope for volatility spillover potential.

EURO AT RISK AS ECB DRAFTS POLICY PATH AND THE EU PICKS ITS NEW PRESIDENT

First, the central bank officials will gather for the ECB Forum in Sintra, Portugal. They will weigh up the economic landscape and are expected to consider whether the Eurozone requires additional monetary stimulus. A formal policy announcement is not in the cards, but markets will keenly parse emerging commentary.

The pace of economic activity growth appears to have stabilized in 2019 after last year’s precipitous decline, but that’s cold comfort considering it is within a hair of six-year lows. Further, regional financial conditions have tightened while the markets’ baseline expectations for growth in 2020 continue to sink.

Taken together, this probably translates into a cautious wait-and-see stance as the ECB awaits the results of its upcoming round of TLTRO bank liquidity injections. A clear dovish tilt in official rhetoric signaling the capacity to do more as needed appears to be likely however.

Later in the week, EU heads of state will convene to fill upcoming leadership vacancies at the Commission and – perhaps more importantly – the ECB. Of the front-runners for Mario Draghi’s job, former Governor of the Bank of Finland Erkki Liikanen seems like a choice the markets would find reassuring.

Mr Liikanen is a known quantity in the EU and is broadly seen as consensus-building moderate with a steady hand. Germany’s ultra-hawkish Jens Weidmann may be supportive for the Euro but little else. Berlin will probably insist that France’s François Villeroy de Galhau be sidelined also on balance-seeking grounds.

On balance, a clearly accommodative bias emerging from the Forum coupled with a broadly status-quo pick like Mr Liikanen for the next ECB President seem most probable. Taken together, they probably carry modestly bearish implications for the single currency.

FED OUTLOOK UPDATE, BOE COMMENTARY MAY STOKE EURO VOLATILITY

Looking beyond the borders of the Euro area, potent cross-currents are likely to emerge from the US and UK. First, a monetary policy announcement from the Fed will bring an update of official rate path projections. The markets are priced for dramatic easing: 2-3 cuts this year, plus the end of the QT balance sheet unwind.

That strikes a hard contrast with the FOMC’s March forecast of no changes this year and one hike in 2020. While a dovish adjustment seems likely, a relatively more modest one than what investors have envisioned might boost the US Dollar and pressure the Euro via a lower EURUSD exchange rate.

Meanwhile, a second round of leadership voting in the UK Conservative Party might bring Boris Johnson closer to replacing Theresa May as Prime Minister. He won the first round by a landslide. That didn’t seem to register a strong market response, but progress on the contest may yet bring regional volatility.

A rate decision from the Bank of England and the annual Mansion House speech from its Governor Mark Carney are also due. No changes are expected as Brexit uncertainty keeps officials sidelined but steep economic deterioration over the past month may prompt worrying remarks, rattling European markets.

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

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

EURO TRADING RESOURCES

OTHER FUNDAMENTAL FORECASTS:



Japanese Yen Remains Biased Higher But Could Struggle This Week

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Fundamental Japanese Yen Forecast: Neutral

  • With rising global risks comes a rising bid for the Japanese Yen
  • This isn’t going away anytime soon given the complex nature of those risks
  • But they might just back off a bit in the coming sessions

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

The Japanese Yen and the US Dollar find themselves still very much locked in a ‘battle of the havens’ as global uncertainties economic uncertainties multiply.

It’s sobering to consider that many in the markets quite seriously hoped to see a trade deal between the US and China by the time May ended. While that always seemed like a stretch, the actual collapse in trade relations between the two global titans has been quite shocking and continues to loom over all else.

‘All else’ includes plenty of other likely snags too, from the endless drama of Brexit to the clear fragmentation of European politics. China’s economy is in an unwelcome spotlight too, with its manufacturing sector revealed to have contracted once more in May after just two months of recovery.

No wonder then that assets perceived to offer safety in times of high risk should be sought and the Japanese Yen has been winning that haven fight.

USD/JPY has retreated quite sharply from the recent peaks scaled in late April. From the standpoint of technical analysis Yen bulls do look a little exhausted as a new trading week gets under way. With that in mind it may take some real bad news to bolster the general flight to safety and move USD/JPY meaningfully lower in the short term, even if more falls look all-too-likely further out.

There are a few possible triggers coming up in a week rich with important economic events. Australia’s central bank will give its monetary policy decision on Tuesday and is widely expected to instigate the first reduction in record-low interest rates since late 2016. Should it do so, riskier assets than the Yen might get an initial fillip at its expense, but this seems unlikely to last in the general atmosphere of uncertainty. The European Central Bank will also give a policy statement and, while it is not expected to act, it is hard to see how that organization can sound anything other then extremely cautious about the Eurozone’s prospects.

The week will end with official US employment numbers. This crucial series remains among the global economy’s few clear bright spots. Any outcome close to the 195,000 new non-farm jobs expected for May will probably see a measure of reassurance creep back in to trading.

All in all, this may be a week in which Japanese Yen struggles for further gains, but that prognosis assumes as-expected data outcomes and no nasty surprises out of left field. The latter is obviously a brave assumption in this market. Still, it’s a neutral call this week. Just.

USDJPY

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

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GBPUSD Rate Outlook Hinges on Bank of England (BoE) Forward Guidance

Central bank policy, economic indicators, and market events.

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GBPUSD

British Pound Rate Talking Points

GBPUSD holds a narrow range as the UK Leadership Contest gets underway, but the Bank of England (BoE) meeting on June 20 may shake up the near-term outlook for the British Pound if the central bank alters the forward guidance for monetary policy.

Fundamental Forecast for British Pound: Neutral

The British Pound may face range-bound conditions as the BoE is widely expected to retain the current policy, but fresh data prints coming out of the UK may sway the monetary policy outlook as the Consumer Price Index (CPI) is expected to narrow to 2.0% from 2.1% per annum in April, while Retail Sales are projected to fall 0.8% in May.

Signs of a slowing economy may produce headwinds for the British Pound as it puts pressure on the Monetary Policy Committee (MPC) to abandon the rate hiking cycle, and Governor Mark Carney and Co. may gradually change their tune over the coming months amid the persistent threat of a no-deal Brexit. In turn, BoE officials may adopt a more dovish tone as the “economic outlook will continue to depend significantly on the nature and timing of EU withdrawal,” and a material adjustment in the forward guidance for monetary policy may undermine the recent rebound in GBPUSD as it spurs speculation for a change in regime.

In contrast, more of the same from the MPC may keep the British Pound afloat as “the Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

As a result, GBPUSD may continue to consolidate if the BoE sticks to the same script, but retail sentiment remains stretched despite the range-bound conditions, with retail FX traders still net-long Pound Dollar.

Sentiment

The IG Client Sentiment Report shows 77.1% of traders are still net-long GBP/USD compared 79.8% in late-May, with the ratio of traders long to short at 3.36 to 1. Keep in mind, traders have remained net-long since May 6 when GBPUSD traded near 1.3230 even though price has moved 3.4% lower since then.

The number of traders net-long is 1.8% higher than yesterday and 1.5% lower from last week, while the number of traders net-short is 4.5% lower than yesterday and 0.9% higher from last week. The persistent tilt in retail sentiment offers a contrarian view as GBPUSD snaps the upward trend from late-2018, with the Relative Strength Index (RSI) highlighting a similar dynamic.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

GBP/USD Rate Daily Chart

GBPUSD

Keep in mind, the broader outlook for GBP/USD is no longer bullish as the exchange rate snaps the upward trend from late last year after failing to close above the Fibonacci overlap around 1.3310 (100% expansion) to 1.3370 (78.6% expansion).

As a result, the advance from the 2019-low (1.2373) may continue to unravel, with the near-term outlook mired by the failed attempt to push back above the Fibonacci overlap around 1.2760 (38.2% retracement) to 1.2800 (50% expansion).

Need a move back below the 1.2610 (23.6% retracement) to 1.2640 (38.2% expansion) region to bring the Fibonacci overlap around 1.2370 (50% expansion) to 1.2440 (50% expansion) back on the radar.

Will keep a close eye on the RSI as the oscillator extends the bearish formation from earlier this year, with a move below 30 raising the risk for another selloff in the exchange rate as it suggests the bearish momentum is gathering pace.

Additional Trading Resources

For more in-depth analysis, check out the 2Q 2019 Forecast for GBP/USD

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.



Gold Prices Ride Trade-War, Low Yield Wave But Rally May Pause

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Gold

Fundamental Gold Forecast: Neutral

  • Gold is supported by trade tensions and crumbling bond yields
  • As investors rethink prospects for higher interest rates, it may do better still
  • Consolidation is probably needed first though

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Gold prices remain close to their 2019 peaks, buoyed up by a range of supportive factors which have added to the luster of all perceived haven assets.

Trade tensions remain very high of course, particularly between China and the US where signs of rapprochement are as elusive as ever. China is not the only economy in White House sights, and, while there seems to be some more trade geniality around between the US and Mexico, it is hard to be sure of anything until agreement is reached. It may be, but there’s no sign yet.

It seems all-too likely that trade news flow will continue to dominate short-term sentiment toward gold in the coming week.

It won’t be the only factor. The overall backdrop is becoming more friendly to non-yielding assets like precious metals as the yield on ‘risk free’ paper like Treasuries and German bunds heads lower. With German yields close to record lows markets are clearly nor pricing in much in the way of European growth ahead. Federal Reserve Chairman Jerome Powell last week said the central bank will act as appropriate to sustain expansion. Sure enough, investors are weighing the prospect of lower US rates.

One thing is certain. The global monetary scene will remain extremely accommodative for the foreseeable future, even if it becomes no more so. This low-rate environment should ensure that gold is at least underpinned even if the markets do get some better trade news in due course. Even solid signs of progress between Washington and those countries which have irked the White House with persistent trade surpluses may not be the magic cure for the global economy’s malaise which many clearly hope it will be.

The coming week will bring little in the way of first-tier economic data. European Central Bank President Mario Draghi will speak on Wednesday, a day which will also bring US Consumer Price Index figures. Both events could have some bearing on gold market action, but they are unlikely to move the story on enough to change the current mood.

That said gold has come up quite far, quite fast and, assuming that the trade story doesn’t meaningfully move on, it may pause for breath. It’s a neutral call from me this week.

Gold

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

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

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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



Australian Dollar Won’t Be Spared By This Week’s Focus On the Fed

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AUDUSD

Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar was hit by a variety of factors last week
  • Perhaps the most notable was weak full-time job creation, formerly a reliable prop
  • It’s hard to spot reasons why it should gain in the coming sessions

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 endured another punishing week last week but may not face a repeat performance in coming sessions if only because market focus is likely to be elsewhere. Even so it is hard to get bullish on a currency facing not so much headwinds as roaring gales.

The US Federal Reserve will give its June monetary policy decision on Wednesday (early Thursday for Asia Pacific). Economists don’t expect any changes but the chance of a move lower for the Federal Funds Target Rate in July is now deemed to be very high. The ‘Fedwatch’ tool from the Chicago Mercantile Exchange puts it at more than 80%.

One slight problem for Aussie bulls may be that it may now be hard for the US central bank to appear more ‘dovish’ in its policy prognosis than the market. This may mean at least short-term gains for the greenback against major rivals in the wake of the Fed’s June call, even if lower rates next month remain very much in prospect.

On the domestic front Australian Dollar watchers can look forward to house price data, the minutes of this month’s Reserve Bank of Australia monetary policy meeting, which produced a rate cut, and Purchasing Managers Index data for June.

None of these is likely to move the dial on expectations that Australian rates will head lower again, possibly quite soon. The currency was hit last week by news of feeble full-time job creation and by a rise in Chinese inflation, which may have raised expectations that Beijing could cut stimulus. This is never a sight welcomed by those who view the Australian Dollar as a handy China proxy bet.

More broadly US accusations that Iran was behind last Thursday’s attacks on oil tankers in the Gulf of Oman may keep a firm lid on risk appetite, even if the State Department’s response has so far emphasized diplomacy over force. There’s still no sign of trade peace between China and the US either.

Given all of the above, it is still very hard to get bullish about the Aussie. There are some glimmers of light behind it, notably from the direction of iron ore prices. High and likely to go higher, they can probably slow the currency’s fall but, in an environment in which interest rates are effectively gravity, they can’t stop it.

It’s another bearish call, with the caveat perhaps that the bears may already be a little exhausted and in need of another catalyst before they really push on.

AUDUSD

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!



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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