US Dollar Outlook Hinges on the Severity of Coming Market Turmoil

Fundamental analysis, economic and market themes

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US Dollar Outlook Hinges on the Severity of Coming Market Turmoil

Fundamental Forecast for the US Dollar: NEUTRAL

  • White House reshuffle, China tariffs trigger panic across financial markets
  • US Dollar still unsure of its role amid the chaos and searching for direction
  • Severity of on-coming liquidation to decide if the greenback will rise or fall

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US politics triggered brutal bloodletting across financial markets last week, handing the bellwether S&P 500 stock index its biggest loss in over two years. A staff reshuffle at the White House purged moderating voices on the foreign policy front shortly after the same fate befell the economics team, surrounding President Trump with a cadre of enablers encouraging his most bellicose tendencies.

The exit of top economic advisor Gary Cohn in opposition to tariffs that Mr Trump levied on steel and aluminum imports paved the way for still more protectionism. This time, the President slapped China with tariffs of up to $60 billion as punishment for alleged intellectual property theft, which Beijing promptly promised to counter with duties of their own.

Not surprisingly, the markets are worried that the subsequent ouster of Secretary of State Rex Tillerson and last week’s resignation of National Security Advisor H.R. McMaster will precede escalation of another kind. Tellingly, Mr McMaster will be replaced with former UN Ambassador John Bolton, a vocal hawk that has advocated preemptive military action against Iran and North Korea.

The US Dollar seems to be of two minds about all of this. At times, it adopted the haven role it played during the 2008-09 crisis and its immediate aftermath, rising on the back of market turmoil. These forays to the upside have been promptly checked as markets weighed the probability that a meltdown in risk appetite will derail the Fed’s rate hike cycle.

Incoming economic data is unlikely to help the greenback remedy this conflict. A revision of fourth-quarter GDP data is expected to see thegrowth upgraded from 2.5 to 2.7 percent. Meanwhile, the Fed’s favored PCE inflation gauge is forecast hit 1.6 percent in February, the highest in 11 months. These outcomes will reinforce the FOMC’s cautious optimism, but that is probably the extent of their significance.

On balance, the outlook likely hinges on the severity of continued liquidation across the risky asset universe. Aggressive, broad-based selling akin to Friday’s price action will probably boost the greenback as capital flows favor liquidity above all else. A slower grind that leaves open the possibility that markets can muddle through without derailing the global recovery altogether might keep yields in focus, sending it lower.


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

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Euro at the Behest of Trade Tensions, FOMC and BOE Meetings this Week

News events, market reactions, and macro trends.

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Euro at the Behest of Trade Tensions, FOMC and BOE Meetings this Week

Fundamental Forecast for EUR/USD: Neutral

- The Euro’s early-week gains were undercut by a rocky second-half last week, although it still gained against all of the commodity currencies.

- A continued underperformance of data relative to expectations alongside eroding inflation expectations may soon bite the Euro.

- The IG Client Sentiment Index is no longer bullish EUR/USD, although the retail crowd remains net-short.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

A week after the European Central Bank met, traders have still yet to make up their mind about the Euro. The single currency for 19 countries in the Eurozone lost ground against the Japanese Yen, British Pound, and US Dollar once more, but edged higher against the commodity bloc – the Australian, Canadian, and New Zealand Dollars.

Yet very much like last week, whereby the Euro was not in control of its own destiny due to the absent economic calendar, the week ahead seems to be a repeat of sorts, where the influences from other currencies prove overwhelmingly more important than anything emanating out of the Eurozone itself.

While the Eurozone economic calendar has significantly more events on it during this week relative to last, none measure up to how significant rising trade tensions with the United States are proving, nor will any data releases come close to the impact that the March Federal Reserve (Wednesday) and Bank of England (Thursday) meetings will be.

Examining general data momentum, the Citi Economic Surprise Index for the Eurozone finished last week at –31.7, down from -21.6 on March 9. This is a dramatic reversal of fortunes from just a month ago, when the index read +35.7; and now the gauge is at its lowest reading since April 2016.

As has been the case the past few weeks, futures positioning suggests downside still might be easier to come by than upside given the disappointing economic backdrop: net-longs held by speculators increased to +146.4K contracts through the week of March 13, up from +133K in the week prior.

Mutually exclusive from the FOMC and BOE meetings, fundamental indicators that we monitor paint a discouraging picture for the Euro. Taking a look at inflation expectations, the 5-year, 5-year inflation swap forwards, ECB President Draghi’s preferred gauge of price pressures, finished last week at 1.685%; a month ago, they were at 1.750%. Needless to say, inflation expectations are moving in the wrong direction, which serves to undercut the Euro in the near-term.


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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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Japanese Yen Looks to US PCE and Continuing Trade Developments

Japanese Yen Looks to US PCE and Continuing Trade Developments

Japanese Yen Fundamental Forecast: Neutral

Talking Points:

  • Anti-risk Japanese Yen appreciated last week as sentiment soured amidst white house developments
  • Domestic economic calendar docket lacking key event risks, the focus turns to external factors again
  • Keep an eye out for the US PCE core release and reactions from nations to the tariff exemptions

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This past week was a volatile one with plenty of developments which saw stock markets fall and the anti-risk Japanese Yen emerge higher against its major peers. A relatively less hawkish FOMC monetary policy announcement on Wednesday fueled a US Dollar selloff across the aboard and the Yen benefited from it. But things really started heating up the following day.

Seemingly endless developments out of the white house ignited aggressive risk aversion. First Donald Trump’s lead lawyer John Dowd resigned. Then, the president signed off on $50 billion in tariffs aimed at China. Less than eight hours after Dowd’s resignation, National Security Adviser H.R. McMaster met the same fate. All of this helped take USD/JPY to its lowest level since November 2016.

The week ahead will probably leave the Japanese Yen once again mostly vulnerable to external developments as opposed to domestic ones. To give an example, when Japan’s February CPI report crossed the wires at its highest since March 2017 last week, the currency failed to offer a meaningful reaction even though prices moved steadily towards the Bank of Japan’s inflation target.

As far as the local docket goes next week, we have a jobless report due where unemployment is expected to rise to 2.6% from 2.4%. However, the more prominent risk here for the Japanese Yen domestically speaking can be the aftermath of the Shinzo Abe scandal and whether or not it may lead to a new regime change, his popularity has been falling since. We will also see how or if the country responds to it not being included in the tariff exemption list that Mr. Trump announced last week. They are as follows:

US Tariff Exempted Countries:

  • Argentina
  • Australia
  • Brazil
  • Canada
  • European Union
  • Mexico
  • South Korea

On the external front, keep an eye on the US PCE core outcome. This is the Fed’s preferred measure of inflation. Data out of the country has been coming out mostly in-line with economists’ expectations. An unexpected upside surprise here might fuel stronger hawkish Fed rate hike expectations and if stocks fall on this, the Japanese Yen could rise. Although the previous headline inflation report failed to spark much of a reaction.

In addition, with the grace period for the US tariffs now expired and the exempted countries listed, keep an eye out for how exposed nations respond. Shortly after Trump announced tariffs targeted against China, the country retaliated by announcing reciprocal tariffs on US steel, aluminum, pork and wine products. Needless to say, the anti-risk Yen rose amidst these developments.

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for

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

GBP: Foundations in Place for Further Sterling Gains

Fundamental analysis and financial markets.

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GBP: Foundations in Place for Further Sterling Gains

Talking Points:

  • UK inflation-wages gap narrows further, set to turn positive.
  • Two MPC members voted for an immediate 0.25% rate hike on Thursday.
  • EU/UK agree Brexit implementation period.

How are Retail Traders Currently Positioned in GBPUSD and why does it matter?

Fundamental Forecast for GBP: Bullish

We have changed our outlook for GBP to bullish from neutral after a positive week of news for the British Pound. We would however warn against chasing trades and prefer to ‘buy on dips’ after this week’s price action.

The British Pound came back into fashion this week with positive hard data, a hawkish-leaning MPC meeting and news that the Brexit transition period had been agreed between the EU and the UK.

Inflation data may not have stood out as GBP positive at first sight – annual CPI fell to 2.7% from a prior 3.0% - but when coupled with slightly higher-than-expected average wages – 2.6% against 2.5% (ex-bonus) prior – Sterling took comfort that negative real wages may be a thing of the past and rallied.

The EU/UK transition period was expected to be formally ratified at the EU Council Summit at the end of the week but on Monday news broke that both sides expected it to be passed, pushing GBP higher. The extra icing on the Sterling cake came on Thursday when the Bank of England announced that all monetary policy settings were unchanged but the voting pattern showed two MPC members voted for an immediate 0.25% rate hike.

Looking forward to next week, Sterling should have an easier path with little in the way of UK data to deflect it, while noise around Brexit is expected to be muted after the latest agreement. GBPUSD trades comfortably above all three moving averages, the pair is not in overbought territory, while IG Client Sentiment data shows that traders remain net-short of GBPUSD, a contrarian bullish signal. A break back above this week’s high at 1.4220 should open the way to 1.4280 before re-testing the 1.43460 multi-month high.

GBPUSD Price Chart Three Hour Timeframe (March 13 – 23, 2018)

GBP: Foundations in Place for Further Sterling Gains

--- Written by Nick Cawley, Analyst.

You can contact the author via email at or via Twitter @nickcawley1.

Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

Short term trading and intraday technical levels

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Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

Fundamental Forecast for Gold: Bullish

Gold prices surged this week with the precious metal up nearly 2.7% to trade at 1348 ahead of the New York close on Friday. The losses come amid continued weakness in broader risk assets with all three U.S. Major Indices down more than 4% on the week. For gold, the advance has taken prices through the monthly opening-range highs and keeps the focus higher heading into the monthly close.

The Federal Reserve raised interest rates this week by 25bps as expected with the updated economic projections highlighting and upward revision to both growth and employment for 2018. Still, the interest rate dot plot continued to suggest that the committee remains on course for three hikes this year as inflation expectations remain firmly anchored at 1.9%.

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For gold, the prospect of a more gradual normalization path from the central bank alleviated the recent downward pressure with mounting concerns over the potential for a global trade war stoking demand for the perceived safety of the yellow metal. From a technical standpoint, Gold has stretched into fresh monthly highs with the advance keeping the near-term focus higher heading into next week.

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Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven DemandGold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +2.09 (67.7% of traders are long)- bearish reading
  • Long positions are 0.2% higher than yesterday and 15.2% lower from last week
  • Short positions are 0.6% higher than yesterday and 19.6% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Spot Gold price trend may soon reverse higher despite the fact traders remain net-long.

See how shifts in Gold retail positioning are impacting trend- Read more about how to impliment Sentiment in your trading!

Gold Daily

Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

Price Chart

Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

A breach above the objective monthly opening-range highs alongside an RSI resistance-trigger break keeps the focus higher in gold heading into the March close. Prices are now poised to post an outside weekly reversal candle off support (bullish). Note that daily momentum has been unable to break below 40 since the yearly high and keeps the momentum profile in a bullish posture for now- look for a weekly close above 60 to confirm.

The rally is attempting to break through the 2018 high-day close at 1348- just higher rests basic channel resistance extending off the yearly high around ~1356. A breach above this threshold is needed to mark resumption with such a scenario targeting the 2016 high close / 2018 high at 1366 backed by a key Fibonacci confluence at 1378/79.

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Gold 120min Price Chart

Gold Prices Bid as Markets Sell-off, Trump Tariffs Stoke Haven Demand

Earlier this month I noted that, “IF prices are heading higher, support into this level should hold (. A breach above the median-line shifts the focus back towards the 1339 target and the upper parallel / 2017 high-day close at 1346.” A closer look at gold sees prices breaking above basic slope resistance extending off the February high with the advance taking out both targets on this stretch. Interim resistance stands with the upper parallel at ~1356. Interim support now 1339 with broader bullish invalidation now raised to the yearly low-day close at 1317.

Bottom line: Look for a high early next week to give way to a near-term set-back in price. Ultimately we’ll be tracking for more favorable long-entries while above 1317 targeting a breach of this channel.

---Written by Michael Boutros, Currency Strategist with DailyFX

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Central bank policy, economic indicators, and market events.

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD trades near the monthly-high (1.2902) as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2018, but a marked pickup in Canada’s Consumer Price Index (CPI) may rattle the near-term resilience in the exchange rate as it puts pressure on the Bank of Canada (BoC) to follow a similar path to its U.S. counterpart.

Fresh forecasts from Fed officials suggest the central bank will stay on its current course of delivering three rate-hikes per year, and the hiking-cycle may prop up USD/CAD over the near-term especially as the BoC endorses a wait-and-see approach for monetary policy.

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

With Fed Fund Futures showing budding expectations for a March rate-hike, the pair stands at risk for a more meaningful recovery going into the end of 2017, but key data prints coming out of Canada may spark a bearish reaction in the dollar-loonie exchange rate as the headline reading for inflation is expected to climb to an annualized 2.0% from 1.4% in October.

The threat for above-target inflation may heighten the appeal of the Canadian dollar its raises the risk of seeing Governor Stephen Poloz and Co. adopt a more hawkish tone in 2018, and the central bank may increase its efforts to prepare Canadian households and businesses for higher borrowing-costs as officials note ‘higher interest rates will likely be required over time.’ On the other hand, a below-forecast CPI print may fuel the near-term resilience in USD/CAD as it raises the BoC’s scope to retain the current policy for the foreseeable future. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/CAD Daily Chart

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Near-term outlook for USD/CAD remains clouded with mixed signals as the pair marks a failed attempt to test the monthly-high (1.2902), with the pair stuck in a narrow range as the 1.2620 (50% retracement) region offers support. Keep in mind, the Relative Strength Index (RSI) highlights a similar dynamic as it struggles to push back into overbought territory, but the broader outlook remains supportive as the oscillator preserves the bullish formation carried over from August.

With that said, topside targets remain on the radar for USD/CAD, with a break of the near-term range raising the risk for a move back towards the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region. Want to learn more about popular trading indicators and tools such as the RSI? Download and review the FREE DailyFX Advanced Trading Guides!

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Australian Dollar Looks Mired In Growing Trade-War Worries

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Australian Dollar Looks Mired In Growing Trade-War Worries

Australian Dollar Fundamental Forecast: Bearish

  • Fears of tit-for-tat tariff imposition have weighed on the Australian Dollar
  • There’s not key domestic information on tap this week to divert attention
  • Trade news flow will be key and doesn’t look promising

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The Australian Dollar was in thrall to overseas events last week and, with very little of note on the domestic data schedule, this week looks set to offer more of the same.

Trade remains gloomily front and center. As a ‘risk asset’ geared to the global cycle, the Australian currency probably has as much to lose as any from any ratcheting-up of trade tensions. And they are ratcheting up. News last week that US President Donald Trump had signed off on US$50 billion of tariffs against China, and threatened more wide ranging trade barriers, was not good news for Aussie bulls.

Indeed, coupled with lower world prices for the raw materials which make up so much of Australia’s exports, tariff worries saw AUD/USD slide last Thursday.

All countries and regions threatened by higher US trade barriers are now considering their options and it seems as though diplomacy and compromise of an order apparently in short supply will be needed to avoid outright trade war. Against this international backdrop it’s hard to see the Australian Dollar making headway. At the very least it will remain hostage to trade headlines.

Domestically the currency still wrestles with a central bank in no clear rush to lift its key Official Cash Rate from its record, 1.50% low, even as US interest-rate rises savage Australia’s long-held yield advantage. Job creation also missed expectations last month and, although it remains reasonably robust, fears about it sustainability have been stoked.

To pile on the worries, at least for bulls the technical picture is darkening too. DailyFX Senior Currency Strategist Ilya Spivak notes that AUD/USD is now being pressured down towards a key support trend which has led the pair higher quite consistently for two years past. Fundamentally the Australian economy is not performing at all badly, but still it’s hard to get too excited about its currency given all of the above.

So It’s a bearish call this week, with at least one eye on the international news flow.

Australian Dollar Looks Mired In Growing Trade-War Worries

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--- Written by David Cottle, DailyFX Research

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New Zealand Dollar Looks to GDP Hype, US CPI & Trade Developments

New Zealand Dollar Looks to GDP Hype, US CPI & Trade Developments

New Zealand Dollar Fundamental Forecast: Neutral

Talking Points:

  • New Zealand Dollar was exposed to US tariff signing and North Korea denuclearization
  • The currency will be facing a local GDP release in which the RBNZ has high hopes for
  • On the external front, next week also brings US CPI and ongoing trade developments

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A lack of key economic news flow from home meant that the New Zealand Dollar was exposed to external factors this past week. In particular, on US protectionism and North Korean developments which stirred sentiment in the markets. The former concluded with Donald Trump signing his tariff proposals while excluding neighboring countries. The latter promised to refrain from conducting more missile tests.

Next week looks to be like a similar scenario for the Kiwi Dollar, but with the addition of risks from home. New Zealand’s fourth quarter GDP is due on Wednesday. Growth is expected to increase to 3.1% y/y from 2.7% in the third quarter. Such an outcome would mean the fastest pace of expansion since 2016. The RBNZ seems to have high hopes for this when it mentioned that growth was expected to strengthen going forward.

But before this data crosses the wires, we will receive the US CPI report on Tuesday. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1%. The core rate on the other hand is expected to remain unchanged at 1.8%. If a surprise to the upside further firms Fed rate hike bets, the New Zealand Dollar’s appeal could be undermined as it becomes more evident that it will lose its yield advantage to the greenback.

Outside of economic data releases, Kiwi Dollar traders should keep an eye out for news that are related to Mr. Trump’s tariff proposals. Actions ranging from countries retaliating to the possibility of more being exempt could stoke volatility in the sentiment-linked unit.

What could even be underpriced in the markets is the potential for Italian political risk. The country was left with a hung parliament after a general election in which the eurosceptic Five Star Movement was left with the most votes for a single party. News that a majority government forms with the anti-euro party could induce risk aversion. Taking these things into consideration, on balance this points to a neutral forecast.

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