Forecasts

US Dollar: Yellen, Key Data May Boost Politics-Driven Volatility

Fundamental analysis, economic and market themes

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US Dollar: Yellen, Key Data May Boost Politics-Driven Volatility

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar down as Senate tax cut proposal underwhelms markets
  • Politics likely still in focus as markets weigh impact 2018 Fed path
  • Yellen speech, CPI and retail sales data amplify risk of volatility

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Politics dominated US Dollar price action last week, as expected. Senate Republicans underwhelmed with their version of tax cut legislation, offering up a plan that differed on several key points with the House of Representatives proposal and thus opening the door to a thorny reconciliation process. Perhaps most critically, the Senate’s scheme would delay corporate tax cuts until 2019.

The greenback did not take kindly to these developments. Traders have expected expansionary fiscal policy championed by the Trump administration to boost inflation, forcing the Federal Reserve into a steeper rate hike cycle. Ebbing confidence in GOP lawmakers’ ability to steer campaign promises into legislation undercut this narrative, with the currency snapping a three-week winning streak.

Looking ahead, the scramble to negotiate a single tax reform bill and pass it before year-end will generate a steady stream of headlines from Washington DC, keeping last week’s themes very much in play. This time however, price action will be further complicated by a barrage of top-tier economic data releases and speeches from key policy officials.

Fed Chair Janet Yellen is due to speak on Tuesday and might be a bit more candid now that Jerome Powell has been nominated to replace her in February. The following day, CPI and retail sales statistics are due to cross the wires. Softer results from the prior month are expected on both fronts but broad outperformance on US economic news-flow in recent months opens the door for upside surprises.

A rate hike in December is all but priced in, suggesting the 2018 policy path is the central object of speculation. This probably tilts the scales toward politics as the more potent catalyst at work. Still, a change in the baseline assumption for where the Fed expects to go in 2018 – coming from Chair Yellen or a sharp deviation from forecasts on key data – might substantially alter the way forward.



Euro Proving Resilient, May Continue to Ignore Economic Calendar

News events, market reactions, and macro trends.

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Euro Proving Resilient, May Continue to Ignore Economic Calendar

Fundamental Forecast for EUR/USD: Neutral

- The Euro was among the top performers last week, as a lack of negativity surrounding the single currency gave it ample room to recover versus others dealing with simmering issues (Brexit, US tax reform).

- Positioning data for the week ending November 7 was not released last Friday; will be released on November 13.

- Retail positioning points to mixed conditions for EUR/USD in the coming days.

The Euro had a better performance in the second week of November, even as the quieter economic calendar left the single currency at the whims of influences coming from other major currencies. EUR/USD was the top performing EUR-cross, for example, as details surrounding progress of tax reform legislation in the United States proved disappointing. EUR/GBP, on the other hand, was the worst performing EUR-cross, as positive developments in the Brexit negotiations eased pressure after the Bank of England’s policy meeting.

The coming days offer a few opportunities for event-driven volatility in the Euro, at least more so than last week; neither the best or worst performing EUR-crosses saw gains outside of +/- 0.5%. The Euro-Zone economic calendar is littered with over two dozen individual data releases, but none seem destined to significantly alter the trajectory of the Euro. Nevertheless, two releases are worth watching for.

First, on Tuesday, the second Q3’17 Euro-Zone GDP reading is expected to confirm the +2.5% annualized rate initially reported, but given some of the individual countries’ expected GDP readings – Germany, France, Italy, and Spain – it is possible that a beat is in the cards. On Thursday, the final October Euro-Zone CPI report is due, and is expected to show a decline in price pressures from +1.5% to +1.4% (y/y).

Perhaps the most interesting event on the calendar in the coming week is the round table discussion being held on Tuesday in Frankfurt, Germany, featuring ECB President Mario Draghi, Fed Chair Janet Yellen, and Bank of Japan Governor Haruhiko Kuroda. It’s not necessarily the forum in which new policies would be revealed, and just two weeks away from the October policy meeting, it seems highly likely that Draghi will use his speaking time to reflect on the extraordinary monetary policies employed since the Global Financial Crisis.

Overall, the Euro is proving resilient thanks to study and steadily improving fundamentals of the Euro-area. Economic data momentum remains firm, with the Euro-Zone Citi Economic Surprise Index finishing last week at +58.9, up marginally from +58.7 a week earlier and up from +55.7 a month ago. On the price pressures side, the 5-year, 5-year inflation swap forwards (one of ECB President Draghi’s preferred gauges) closed last week at 1.679%, higher than the 1.659% reading a week earlier, and still higher than the 1.639% reading a month ago. Given broad Euro strength over the past few months, any signs that inflation is trending higher will ease ECB concerns over taper the pace of its asset purchases as the calendar turns into 2018.

For now, despite the Euro-Zone economic calendar proving saturated over the coming week, the lack of significant top line events means the Euro will be largely driven by developments unfurling for other currencies, like headlines around the Brexit negotiations or tax reform in the United States.

See our Q4’17 Euro forecast - check out the DailyFX Trading Guides.

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

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

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USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Central bank policy, economic indicators, and market events.

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USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Fundamental Forecast for Japanese Yen: Bullish

USD/JPY snaps the monthly opening range during the first full-week of November, and the pair face a growing risk of giving back the advance from the 2017-low (107.32) as the U.S. economic docket is expected to highlight a subdued outlook for inflation.

With the U.S. Consumer Price Index (CPI) anticipated to slow to an annualized 2.0% from 2.2% in September, signs of easing price pressures may rattle the near-term recovery in the dollar-yen exchange rate as it limits the Fed’s scope to implement higher borrowing-costs in 2018.

USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Even though the Federal Open Market Committee (FOMC) appears to be on course to deliver a December rate-hike, a growing number of central bank officials may trim the longer-run forecast for the benchmark interest rate as inflation continues to run below the 2% target. As a result, the FOMC under current Governor Jerome Powell may adopt a more gradual approach in normalizing monetary policy as ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

With that said, market participants are likely to pay increased attention to the European Central Bank’s (ECB) first conference on central bank communications from November 14 to 15 as Chair Janet Yellen is scheduled to join a panel with President Mario Draghi, Bank of England (BoE) Governor Mark Carney and Bank of Japan (BoJ) Governor Haruhiko Kuroda, but Chair Yellen may refrain from saying anything new with her term set to expire in February.

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USD/JPY Daily Chart

USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Failure to preserve the monthly opening range brings the downside targets back on the radar for USD/JPY especially as both price and the Relative Strength Index (RSI) break the bullish formations carried over from September. The string of failed attempts to close above the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region raises the risk for a move back towards 112.30 (61.8% retracement) to 112.80 (38.2% expansion), with the next downside hurdle coming in around 111.10 (61.8% expansion) to 111.30 (50% retracement), which sits just beneath the October-low (111.65).

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GBP: Resilient Despite Bad News On All Fronts

Financial markets, economics, fundamental and technical analysis.

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GBP: Resilient Despite Bad News On All Fronts

Talking Points:

  • The British Pound has held its ground in recent days even though there has been no Brexit breakthrough and PM May’s grip on power seems increasingly tenuous.
  • That suggests a lack of interest in selling the currency and if the bad news is now in the price it could even rally.
  • Much will depend, though, on the economy – and the week is packed with important data and speakers.

Fundamental Forecast for GBP: Neutral

What Does the Fourth Quarter Hold for the Pound, Equities, Oil and Other Key Markets? Find out here

Despite the Brexit negotiations between the UK and the EU seemingly making little progress, and UK Prime Minister Theresa May losing two members of her cabinet already this month, the British Pound has been remarkably stable.

After falling sharply on November 2, after the Bank of England’s “dovish hike” in interest rates, GBPUSD has recovered most of the lost ground.

Chart: GBPUSD One-Hour Timeframe (November 1 – 10, 2017)

GBP: Resilient Despite Bad News On All Fronts

Chart by IG

Similarly, EURGBP has lost most of the gains made after that sharp move when the Bank of England hinted that any further tightening of monetary policy would be slow and gradual.

Chart: EURGBP One-Hour Timeframe (November 1 – 10)

GBP: Resilient Despite Bad News On All Fronts

Chart by IG

Against such an unpromising background, the Pound’s ability to roll with the punches has been impressive. Moreover, unless the Brexit talks break down completely, the Prime Minister is forced out of office or the Bank of England turns even more dovish, it is hard to see where any more bad news could come from.

This all suggests that the Pound could rise further but caution is called for during the most important week of the month for UK economic data. First, on Tuesday, are the inflation figures for October, which are expected to show a small rise to 3.1% from 3.0% in the year/year rate. The day after, labor-market data could show an increase in the claimant-count measure of unemployment last month, and October’s retail sales numbers, due Thursday, were probably almost flat month/month and down year/year.

In addition, several Bank of England policymakers are speaking Thursday so erring on the side of caution is probably the best course of action.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid

Short term trading and intraday technical levels

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Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid

Fundamental Forecast for Gold:Neutral

Gold prices snapped a three-week losing streak with the precious metal rallying 1.17% to trade at 1284 ahead of the New York close on Friday. The gains come on the back of weakness in the greenback with the U.S. Dollar Index (DXY) coming off of four-month highs. The sell-off in global benchmark equity indices have caught the markets attention as the likelihood of U.S. tax reform continue to diminish.

Looking ahead to next week, traders will be eyeing the release of the October U.S. Consumer Price Index (CPI) and retail sales on Wednesday. Although the Fed is widely expected to raise interest rates next month, continued signs of subdued price growth may keep the central bank on hold in the first half of 2018 amid the upcoming rotation within the FOMC.

With Governor Jerome Powel nominated to take the helm, the Fed appears to be on course to delivery three rate hikes per year. However, the upcoming appointments for the Vice Chair and New York Fed President may raise the risk for policy error as inflation continues to run below target. That said, gold may continue to shine amid uncertainty surrounding the U.S. monetary policy outlook and prices are likely to remain supported should a growing number of officials trim the longer-run forecast for the benchmark interest rate.

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Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +3.82 (79.3% of traders are long)- bearish reading
  • Long positions are 2.9% higher than yesterday and 3.1% higher from last week
  • Short positions are 0.9% higher than yesterday and 17.8% 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 more net-long than yesterday but less net-long from last week and the combination of current positioning and recent changes gives us a further mixed Spot Gold trading bias from a sentient standpoint.

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Gold Daily

Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid

Our ‘bottom line’ last week noted that, “heading into November trade I’ll be looking for an exhaustion low, preferably early in the month, with a breach above this near-term descending slope needed to get thing going on the long-side.” Gold prices rebounded off key support this week at 1263/67- a region defined by the 38.2% retracement of the December 2016 advance, the 61.8% retracement of the July rally and the 200-day moving average. Note that this range also represents the monthly opening-range lows and if broken, would shift the focus back towards slope support backed by broader bullish invalidation at 1240/43.

Gold 240min

Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid

Gold Snaps Three-Week Losing Streak, Soft U.S. CPI to Keep Prices Bid

A closer look at near-term price action sees gold breaking the topside of the descending channel formation extending off the October high with the advance taking gold prices just below the 61.8% retracement at 1289 ahead of the close. Heading into next week, the focus remains higher while above 1272 with a breach targeting 1299 backed by more significant resistance at 1305/09. Bottom line: IF this breakout is the real deal, look to fade weakness while above the monthly open (1271).

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

Follow Michael on Twitter @MBForex contact him at mboutros@dailyfx.com or Click Here to be added to his email distribution list.



Canadian Dollar Battles Headwinds Ahead of Inflation Release

Fundamental analysis and financial markets.

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Canadian Dollar Battles Headwinds Ahead of Inflation Release

Talking Points:

  • Oil is underpinning the Loonie but US shale supply looms.
  • Friday’s inflation data will steer the central bank’s monetary policy for the rest of the year.
  • The October USD/CAD high may come back into play.

Fundamental Forecast for CAD: Neutral

We remain neutral on the Canadian Dollar but would look closely at buying USD/CAD if oil prices start to turn lower or if Friday’s inflation release disappoints to the downside. In addition, negative news surrounding the ongoing NAFTA renegotiations with the US would also weigh heavily on CAD and prompt opening a short CAD position.

The Loonie has been dragged higher lately by a resurgent oil complex with US Crude hitting a 28-month high around $58/brl earlier this week on ongoing tensions in the Middle East. However a higher crude price has bought US shale producers back to the party with the latest EIA data showing US crude production hitting an all-time high of 9.62 million barrels of oil a day in the week through November 3.

And the potential downturn in the price of oil may not be the only headwind facing the Canadian Dollar with the upcoming inflation release – Friday November 17 – likely to show consumer prices falling short of the central bank’s target of 2%. Last month inflation rose to 1.6% from 1.4% on the back of higher gasoline prices, however excluding gas prices inflation was a more lowly 1.1%, according to Statistics Canada.

The low level of inflation is also likely to stay the central banks’ hand and keep Canadian interest rates unchanged from their current level for the rest of the year. A weaker CAD would help the central bank by importing inflation and driving consumer prices higher in an economy where wage inflation remains elusive.

A look at the daily USD/CAD chart shows the pairs’ first target is the 23.6% Fibonacci retracement level at 1.27136 ahead of a larger move to the late October high of 1.29150.

Chart: USD/CAD Daily Timeframe (April 25 – November 10, 2017)

Canadian Dollar Battles Headwinds Ahead of Inflation Release

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--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1



Australian Dollar Looks Stuck But May Yet Break Its Downtrend

Financial markets, economics, journalism and fundamental analysis.

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Australian Dollar Looks Stuck But May Yet Break Its Downtrend

Fundamental Australian Dollar Forecast: Neutral

  • AUD/USD’s long slide seems to be halting
  • The pair seems to have entered a consolidation phase which may break its downtrend
  • However, that phase looks set to last this week, at least

Find out what the retail foreign-exchange community thinks of the Australian Dollar at the DailyFX Sentiment Page

Australian Dollar bulls are getting some help from the US as a new week gets under way.

Last week brought news that keenly-awaited US corporate tax cuts won’t now be coming until 2019 at the earliest. That gave the greenback a general knock – not least against the Aussie. Weekly jobless-claim data didn’t help either – although the surprise gain there came from multi-decade lows the week before.

Still, that help came in handy because the Reserve Bank of Australia certainly didn’t do a lot for its currency. It left interest rates alone at record lows and, again, seemed in no hurry whatever to raise them. That impression was only bolstered by the subsequent release of its regular Monetary Policy Statement in which the RBA worried (yet again) about the effects of too strong a local currency on both growth prospects and its inflation mandate.

All up last week’s trade saw AUD/USD going nowhere much, although its retreat from 2017’s highs has palpably slowed, with range trading taking its place. The coming week is very likely to see continuation of this theme. The big domestic event will be Australia’s official employment report which is coming up on Thursday. There’s scope for the Aussie to gain if this manages to come in strongly, but probably not enough to see the AUD/USD trading dial move significantly

We know from last week’s RBA statement that slow income growth continues to dog the Australian consumer even at current, relatively strong employment levels. And unless strong employment puts upward pressure on consumption and prices then its monetary implications are limited.

The Australian Dollar seems set to remain broadly rangebound in the coming sessions, with the US economic story probably more likely to drive events in AUD/USD. From the more technical side it is worth noting that even a continuation of the current range would mean a break of the persistent downside channel in place since September 20.

Australian Dollar Looks Stuck But May Yet Break Its Downtrend

Conventional wisdom would suggest that the prevalent downtrend will resume once the current consolidation phase is over, but that phase will probably last the coming week.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX



The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Price action and Macro.

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The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Talking Points:

Fundamental Forecast for NZD: Bearish

The New Zealand Dollar spent much of this week clawing back losses that had very much dominated the currency’s price action over the past few weeks. Bigger picture, we can really draw back to July to focus in on when the pain really started to show for the Kiwi. This is when NZD/USD was trading over the psychological level of .7500, and this came on the heels of an aggressive rally that took two-and-a-half months to build-in over 700 pips on the pair. But in the three months since, the entirety of those gains have been eradicated. This bearish move in the New Zealand Dollar saw another fresh wave of selling on last month’s news around New Zealand elections, and after catching a bounce at the 2017 low last week, prices spent most of this week trudging-higher.

NZD/USD Daily: Corrective Gains for the Kiwi After Last Week’s Bounce at 2017 Low

The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Chart prepared by James Stanley

After newly-installed Prime Minister Jacinda Ardern’s Labour party crafted a coalition with the NZ First Parties, a blip of strength had temporarily showed-up in the Kiwi spot rate. This was very much driven by the prospect of an increase in the minimum wage; with the hope being that higher wages as brought upon by legislation could force stronger rates of inflation which, eventually, can put the Reserve Bank of New Zealand in a spot where they have to hike rates. But – that strength was short-lived, as Ms. Ardern is also promoting a modification to the Reserve Bank Act, and this can radically change the way that the RBNZ does business.

The proposed change would make the RBNZ also accountable for full-employment. This would be the incorporation of an additional mandate, on top of the RBNZ’s current focus of inflation. The change would effectively put the RBNZ in a spot where they have to try to balance the forces of inflation and employment, similar to the Federal Reserve utilizing a dual mandate versus the single mandate of Central Banks like the ECB. This is also happening while lawmakers consider an additional committee to manage the cash rate, and this invites a whole host of uncertainty around the future of the Kiwi-Dollar spot rate, along with that of the RBNZ itself.

On top of all of that potential change, next week sees Interim RBNZ Governor Grant Spencer conduct his first full monetary policy statement, and this also happens to be the first RBNZ rate decision under the new Labour-led government. There are no expectations for any moves on rates, and for the next expected adjustment, markets are currently looking out to Q4 of 2018 for a potential hike. The one possible area for change at next week’s rate decision is an adjustment to inflation expectations in order to account for the weaker currency. In Graeme Wheeler’s final press conference as the head of the bank in August, the RBNZ said that they anticipate rates staying on hold until at least September of 2019. Since then, we’ve seen inflation come-in at 1.9% versus the RBNZ’s projection of 1.6%, and the additional slide in NZD will likely necessitate a small adjustment for forward-looking inflation figures.

While stronger rates of inflation could eventually drive rates-higher, the prospect of change within the Reserve Bank Act will likely continue to dampen demand for NZD, at least in the near-term, as the rest of the world becomes more familiar with what a Jacinda Ardern-led New Zealand will end up looking like. The one thing that does appear certain is that Ms. Ardern is not satisfied with business as usual, and this can lead to further change. Markets, generally speaking, abhor change as this presents risk; and while the potential around those changes remain uncertain, we will likely see some element of risk aversion until market participants can gain more clarity. The forecast for next week will be set to bearish on the New Zealand Dollar.

--- Written by James Stanley, Strategist for DailyFX.com

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