US Dollar Rise on Fed Rate Hike Bets at the Mercy of Team Trump

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US Dollar Rise on Fed Rate Hike Bets at the Mercy of Team Trump

Fundamental Forecast for the US Dollar: Neutral

  • Fed-derived support for the US Dollar fizzled before G20 meeting
  • USD rebounded on international praise for Sec’y of State Tillerson
  • Fed may boost greenback anew absent more “team Trump” jitters

Is the US Dollar trending as DailyFX analysts expected so far in 2017? Find out here!

The US Dollar was seemingly of two minds last week. Prices initially rallied to a one-month high as Fed Chair Janet Yellen struck a hawkish tone in Congressional testimony. The central bank chief warned against waiting too long to raise rates, sending the greenbackupward alongside Treasury bond yields and steepening the 2017 tightening path implied in Fed Funds futures.

The mood changed abruptly after the week’s stock of policy-shaping news was exhausted. Prices peaked after strong CPI data crossed then the wires and promptly retreated. Investors’ change of heart may have reflected profit-taking on short term long-USD bets ahead of a G20 foreign ministers’ meeting in Bonn, Germany. The outing marked the first such multilateral sit-down for newly installed Secretary of State Tillerson and traders were seemingly worried that he might channel his combative boss, Donald Trump.

As it turned out, the summit passed without incident. Encouraging comments from German Foreign Minister Sigmar Gabriel and his French counterpart Jean-Marc Ayrault in its aftermath seemed to put traders at ease and the US unit launched a spirited recovery (as expected). Tellingly, the benchmark US 10-year Treasury bond and the Japanese Yen – both standby anti-risk assets that tend to rise when sentiment sours – topped and began to drift lower precisely as USD hit its intraday floor and rose alongside the S&P 500.

This seems to offer a blueprint for what may be on offer in the week ahead. Scheduled comments from Fed officials are sprinkled throughout the week and minutes from this month’s FOMC sit-down are due to cross the wires. Recent rhetoric suggests policymakers are determined to put on a brave face and proceed with stimulus withdrawal even as the fiscal outlook remains clouded, with some even talking about scaling down the central bank’s massive balance sheet.

At face value, this seems to bode well for the US Dollar. However, the markets’ jittery disposition to all things coming from Washington DC since the Trump administration assumed power ought to be kept in mind. Any remarks from new Treasury Secretary Mnuchin may be especially market-moving. The White House has tried to talk down the currency, accused several countries of gaming exchange rates for unfair trade advantages and clashed with the ECB about bank regulation. Traders are keen to see if Mr Mnuchin will follow suit.

The US unit may build on Friday’s gains if the Fed ends up dominating the spotlight, stoking March rate hike possibilities. Dangling the prospect of a two-pronged tightening effort – raising front-end borrowing costs and reducing the weight of the balance sheet on the long end of the yield curve – may go a long way indeed. Unsettling news-flow from team Trump may shatter this rosy vision however.

Another Light Economic Calendar Has Euro Following Global Risk Trends

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Another Light Economic Calendar Has Euro Following Global Risk Trends

Fundamental Forecast for EUR/USD: Neutral

- Biggest news for Euro last week was that ECB will deviate away from capital key ratio in asset purchases, not necessarily a surprise given what happened in December.

- EUR-crosses meandering around right now: best performing pair was EUR/GBP, +0.38%; worst performing pair was EUR/JPY, -0.59%

- Positioning in EUR/USD has narrowed over the past week, may be close to a turning point.

Despite the onslaught of headlines last week, the dull economic calendar and lack of significant drivers left the Euro mostly lifeless against its major counterparts, gaining no more than +0.38% (EUR/GBP) or losing more than -0.59% (EUR/JPY). The biggest developments came via central banks, with Federal Reserve Chair Janet Yellen reaffirming her stance that rate normalization is well under way, and with the European Central Bank’s January meeting minutes expressing the necessity for asset purchases to deviate from the capital key ratio. Neither development, of course, was a surprise, limiting the impact on the Euro itself; the Fed has made clear its intentions to raise rates at least twice this year time and again; and the ECB said in December 2016 that it would be materially changing the way its QE program was undertaken.

In the week ahead, despite the few economic data releases that are of some significance, they may not leave much an impact in their wakes. The preliminary February Euro-Zone (and individual country) PMI readings are due on Tuesday, but are not expected to show much movement from January (EZ Composite PMI due at 54.4, unchanged). The Euro-Zone CPI reading for January will be released on Wednesday, but is the second release of the data, and no changes are anticipated (headline at +1.8% y/y, core at +0.9% y/y, both unchanged). On Thursday, the second reading of the Q4’16 German GDP readings are due, and, staying with the theme of the week, no changes are anticipated from the first reading (+1.2% y/y).

Generally, underlying fundamental drivers for the Euro aren’t helping propel the single currency forward, which is something that should be monitored from a longer-term perspective. Euro-Zone economic data has started to disappoint relative to analysts’ expectations, as measured by the Citi Economic Surprise Index. The Euro-Zone CESI closed at +41.5 at the end of the week, down from +63.5 one-month earlier. The 5-year, 5-year inflation swap forwards, a measure of medium-term inflation (and one of ECB President Draghi’s preferred gauges) closed last week at 1.768%, barely changed from 1.755% on January 20. Concurrently, Brent Oil prices have barely moved over the last month, closing at $55.81 on February 17 after closing at $55.49 on January 20.

Elsewhere, the relationship between yields and EUR/USD appears to be returning as a driver again. Recall that in the first week of November 2016, when EUR/USD traded near 1.1140, the German-US 2-year yield spread was roughly -145-bps. At the end of last week, with EUR/USD trading near 1.0616, the spread was -200-bps. While the 20-day correlation between EUR/USD and the German-US 2-year yield spread is currently a pedestrian +0.40, a shorter frequency confirms that the significance of relationship between EUR/USD and yieldsis increasing again: the 5-day correlation was +0.84 on February 17, up from +0.07 two-weeks earlier.

--- Written by Christopher Vecchio, Senior Currency Strategist

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USD/JPY to Track Risk Trends as Yellen Fails to Shift Rate Outlook

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Fundamental Forecast for the Japanese Yen: Neutral

Headlines coming out of the G20 meeting may yield a limited reaction in USD/JPY as the group of global finance ministers strive to avert a currency war, and risk trends may continue to influence the dollar-yen exchange rate over the remainder of the month as both the Federal Reserve and Bank of Japan (BoJ) largely endorse a wait-and-see approach for monetary policy.

The broader outlook for the U.S. dollar remains constructive as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2017, and Chair Janet Yellen and Co. may continue to prepare U.S. households and business for higher borrowing-costs especially as the U.S. economy approaches full-employment. As a result, the recent pickup in the U.S. Consumer Price Index (CPI) may encourage the central bank to lift the benchmark interest rate sooner rather than later, but the remarks from the Humphrey-Hawkins testimony suggests Chair Yellen is in no rush to implement another rate-hike as the central bank head argues ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’

With that said, the 2017 FOMC voting members (Minneapolis Fed President Neel Kashkari, Philadelphia Fed President Patrick Harker and Fed Governor Jerome Powell) schedule to speak in the week ahead may strike a similar tone to Chair Yellen, and the fresh rhetoric may do little to alter the interest rate outlook as Fed Fund Futures continue to highlight limited expectations for a March rate-hike, with market participants still pricing a greater than 60% probability for a move in June. The FOMC Minutes may share a similar and fail to prop up the greenback as officials expect ‘the evolution of the economy to warrant further gradual increases in the federal funds rate,’ and more of the same rhetoric may produce range-bound conditions in the exchange rate, with the pair with the pair at risk of giving back the advance from earlier this month as risk appetite abates.

The recent decline in USD/JPY appears to be tracking a similar pattern in the Nikkei 225, with the benchmark equity index also at risk of testing the monthly opening range following the failed attempt to test the 2017 high (19,698). The quantitative/qualitative easing (QQE) program with Yield-Curve Control should continue to prop up market sentiment as the Bank of Japan (BoJ) intends to further expand the monetary base, but Governor Haruhiko Kuroda and Co. may closely watch the operations at the European Central Bank (ECB) especially as the Governing Council plans to reduce its asset-purchases to EUR 60B/month starting in April. The BoJ may find itself in a similar situation as officials warn any fluctuations in its purchases of Japanese Government Bonds (JGB) will be temporary, but the BoJ seems inclined to retain the status quo for the foreseeable future as it struggles to achieve the 2% target for inflation. The wait-and-see approach by both the FOMC & BOJ may foster range-bound conditions over the near-term, but the deviating paths for monetary policy instills a long-term bullish outlook for USD/JPY, with the pair still operating within bull-flag formation carried over from the previous year.

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USD/JPY to Track Risk Trends as Yellen Fails to Shift Rate Outlook

USD/JPY stands at risk of extending the recent series of lower highs & lows following the failed run at the late-January high (115.58), with a break/close below 112.40 (61.8% retracement) to 112.50 (38.2% retracement) opening up near-term support around 111.60 (38.2% retracement), which lines up with monthly opening range. Nevertheless, the development in the Relative Strength Index (RSI) suggests the weakness will be short-lived as the oscillator breaks out of the bearish formation from late-December, and the dollar-yen may stage a larger advance over the coming weeks/months as Fed officials continue to endorse two to three rate-hikes for 2017.

British Pound Under Pressure As Inflation Begins To Bite Consumers

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British Pound Under Pressure As Inflation Begins To Bite Consumers

Fundamental Forecast for GBP/USD: Bearish

- Evidence piling up that Brexit concerns starting to impact economy, thanks to the weak British Pound.

- Up ahead, the Brexit bill will be making its way through Parliament; the path to triggering Article 50 by the end of March looks clear.

- Crowd positioning in GBP/USD remains very bullish, a contrarian signal for further losses.

The past week was a sorry one for Sterling bulls. A host of data has failed to inspire, and the British Pound ended the week down against both the US Dollar and the Euro after failing to capitalize on the political woes facing both the Greenback and the European single currency. A review of the last week is necessary to express how the fundamental backdrop for the Sterling has deteriorated.

First up on Monday were signs that consumer spending is slowing. Credit card spending in the UK in January grew at one of the slowest annual rates of the past three years, according to data from Visa, rising 0.4% year-on-year, down from 2.5% in December. On the month, consumer spending climbed 0.5% after a 2.5% drop in December. But the data tie in with other signs that Brits are reigning in their spending. The British Retail Consortium reported last week that spending in the November-January festive period rose by the smallest amount since the financial crisis, while the Confederation of British Industry said its January retail gauge dropped by the most since records began in 1983.

The Pound was under more pressure on Tuesday after the latest UK inflation print failed to meet analysts’ expectations. CPI rose +1.8% year-on-year in January, missing expectations of a rise to +1.9%, while core inflation remained unchanged at +1.6%, against expectations of +1.7%.

The following day the UK employment report for the fourth quarter received a lukewarm reception from financial markets. Wage inflation missed expectations, rising just 2.6% year-on-year (both including and excluding bonus payments). While the unemployment rate remained unchanged at 4.8% for the October to December period, the single month rate fell to 4.6% in December, from 4.9% in November – within touching distance of the latest downward revision to the Bank of England’s estimate for the equilibrium level.

Worse was to come Friday, with more indications that rising inflation caused by the Pound’s post-Brexit vote plummet is causing Brits to reign in their spending. January UK retail sales data disappointed with the monthly numbers falling into negative territory. In January retail sales grew by +1.5% y/y, against expectations of +3.4% and a prior month’s reading of 4.1%. On a monthly basis, sales fell by -0.3% compared to expectations of a +1.0% rise and December’s fall of +2.1%.

Looking ahead, retail sales will need to rise in excess of 2% over the next two months in order to prevent retail sales dropping in Q1 and dragging on GDP growth. According to a Bloomberg poll today, investors now see a 17% chance that the Bank of England will raise UK interest rates next month. That compares with 45% at the end of last month. The Pound meanwhile dropped as low as $1.2388 after the data were released Friday, falling by the most in more than two weeks. And with so much event risk ahead, that could mean more weakness. On Monday, the House of Lords is due to look at the Brexit bill. It’s highly unlikely that peers will vote to block the bill altogether, although they may request some amendments, such as the rights of EU citizens resident in Britain, illustrating that the UK’s divorce from the EU remains an uncertain affair.

On Tuesday, investors will chew over UK public finance data. The figures are expected to show substantial flows into the Exchequer’s coffers as people pay their taxes after filling in their self-assessment forms, and that could lead to some small giveaways by Chancellor of the Exchequer Philip Hammond in his March Budget. Wednesday brings the second estimate of Q4 GDP growth and there’s a possibility of an upwards revision to 0.7% from 0.6% given the mostly stronger economic data since the first estimate was published. -OM

--- Written by Oliver Morrison, Analyst

To contact Oliver, email him at

Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes

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Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes

Fundamental Forecast for Gold: Neutral

Gold prices pressed higher for a third consecutive week with the precious metal up 0.39% to trade at 1238 ahead of the New York close on Friday. The gains come on the back of a fresh batch of Fed commentary and while the broader focus remains higher in bullion, prices continue to hold just below key technical resistance.

Highlighting this week’s economic docket was Fed Chair Janet Yellen’s semi-annual Humphrey Hawkins testimony before congress. The remarks casted a slightly more hawkish outlook as Yellen warned of the risks of keeping rates too low for too long and while we’ve heard this commentary before, it’s becoming increasingly more relevant as U.S. economic data continues to heat up. That said, market expectations remains steady for a June rate hike with Fed Fund Futures pricing a 73% chance. Expectations for a hike at the May meeting have climbed to 56% - although it’s important to keep in mind the central bank has never hiked on an off-presser meeting (who knows, it’s the year of the ‘unprecedented’ – maybe they break suit?). For gold, look for a creep higher in interest rate expectations & strength in the greenback to curb demand for the yellow metal.

Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes
  • A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at +1.04 (51% of traders are long)
  • Long positions are 4.0% lower than yesterday and 11.5% below levels seen last week
  • Short positions are 9.1% higher than yesterday and a full 22.2% above levels seen last week
  • Open interest is 2% higher than yesterday and 0.9% above its monthly average.
  • It’s worth noting that the retail crowd has been on this trade and the persistent narrowing in the ratio from recent extremes of +4.5 continues to leave the immediate advance vulnerable while price is below resistance.

Gold Weekly

Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes

Gold Daily

Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes

Gold Prices Flirt with 1250 Hurdle Ahead of FOMC Minutes

We’ve continued to highlight this key resistance zone at 1241/49 over the past few weeks, “with price turning just ahead of the 1249 target (high was 1245). Note that we’ve continued to mark divergence into these highs and I’m still mindful of trying to chase this any higher from here. There’s only been one down week so far this year as equities have continued to push into record highs- that’s not a reason to get bearish, but certainly highlights the threat to the current uptrend.”

The technical picture remains unchanged heading into next week. The advance is at risk below 1250 with interim support eyed at 1217 backed by the median-line (blue) which converges on the May low-day close at 1205 next week. A break below this threshold would suggest a more significant high is in place – That said, a drop into these levels should be viewed as a long-opportunity. A breach above 1250 targets subsequent topside objectives at 1258/62 (52-week & 200-day moving averages) backed by key resistance at 1277/79 Fibonacci confluence.

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

Follow Michaelon Twitter @MBForex contact him at or Click Here to be added to his email distribution list.

The Canadian Dollar Puts BoC Against Traders, Who Will Win?

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The Canadian Dollar Puts BoC Against Traders, Who Will Win?

Fundamental Forecast for CAD: Bullish

Despite a 227,000 increase in U.S. jobs, the Canadian Dollar remained stronger against the US Dollar during a week that front-loaded Canadian economic data. The climate continues to be ripe for Canadian Dollar appreciation despite Stephen Poloz’s speech that seemed to over-mention the “uncertainty” in the current environment.

However, despite the “uncertainty,” the CAD has continued to gain against the US Dollar and may continue to do so as the energy market appears stable and possibly poised for further upside.

Much of the “uncertainty,” that Poloz mentioned 12 times in a speech earlier last week was due to the anticipation of a new NAFTA at the renegotiation request under President Trump. While there is a potential gain for Canada in renegotiation, Canada is the second-largest trading partner to the US. Canada currently runs a top five deficit with the U.S. President Trump has discussed using deficits with trade partners to muscle his way into better trade terms, which is the platform he campaigned on and his first weeks in office seem to show him intent on keeping those promises.

The two significant pieces of economic data next week come on Wednesday's Housing Starts, which is expected to show 207k starts, and could surprise as recent data showed Toronto homes showing a supply shortage that is keeping prices elevated. Next week will close with Canadian Unemployment figures, which showed a 46.1k addition in December, and a reading of +53.7k is anticipated for January payroll growth according to Bloomberg. One of the more exciting components has been the shift toward full-time employment and simultaneous drop in part-time employment, which is a fundamental factor in longer-term economic growth.

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--- Written by Tyler Yell, CMT, Currency Analyst/ Trading Instructor

To contact Tyler, email him at or

Follow him on the DailyFX Real Time News feed and Twitter at @ForexYell.

Australian Dollar May Languish If Only For Lack of Clues

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Australian Dollar May Languish If Only For Lack of Clues

Fundamental forecasts for the Australian Dollar: Neutral

  • Australian Dollar bulls caught a break last week
  • In fact, they caught two, as business and consumer sentiment both galloped ahead
  • There’s reduced scope for more of the same this week

The Australian Dollar caught a couple of breaks last week in the shape of two surprisingly upbeat indicators.

The first was the National Australia Bank’s business-sentiment snapshot. This found commercial Australia feeling better about itself than it had for about nine years. Sure enough, the Aussie got a boost. Then the next day came Westpac’s consumer confidence roundup. That was perky too. Up went AUD/USD once again.

Sentiment matters: AUD/USD

Australian Dollar May Languish If Only For Lack of Clues

Chart Compiled Using TradingView

Had these indicators not beaten expectations then the Aussie would have had a much tougher time. Federal Reserve Chair Janet Yellen was front and center after all. She left the door to higher US rates wide open in her Congressional testimony, saying that it would be “unwise” to wait too long before removing monetary accommodation.

Her colleague William Dudley of the New York Fed seemed to hammer this point a day later. He said that a rate rise could come “soon.” Sure enough, a March move is now very much in play.

That leaves the interest-rate support all on the “USD” side of AUD/USD.

For all the better recent Australian indicators, interest rates there are at record lows and likely to stay that way for some time. How do we know? Well, the most recent statement on monetary policy from the Reserve Bank of Australia fretted that current positive factors such as higher raw material prices may not last. It also worried that the economy may not expand strongly enough to meaningfully bring unemployment down.

It certainly didn’t in January, judging by the data. A rise in headline job creation was muted by a modest tick lower in the unemployment rate and a huge loss of full-time jobs.

The upshot of all this is that the prognosis for Australian interest rates has not changed. They are low. They are likely to remain so until the RBA is convinced that the economy is revving durably. And it isn’t.

The coming week is unlikely to alter that view, if only because scheduled economic clues are scant. There’s no first-tier data out of Australia in prospect at all, apart from a look at wage costs on Wednesday. There are a few interesting second-rank reports, notably the ANZ/Roy Morgan look at consumer confidence, and private capital expenditure data. We will also hear from RBA Governor Philip Lowe. He speaks in Sydney on Tuesday.

Assuming he sticks to the “steady as she goes” script, none of the above seems likely to shift the needle for AUD/USD. It clearly wants to meander higher in response to good Australian numbers. But it is going to take either the dialing back of US rate-rise expectations or the emergence of a more stridently hawkish RBA to really give AUD/USD bulls room to charge.

Neither seems at all likely this week, so a neutral call it must be.

Alright, so it’s your favorite currency. But does anyone agree with you? Take a look at the DailyFX sentiment page.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

New Zealand Dollar Resilience Vulnerable to Dovish RBNZ

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New Zealand Dollar Resilience Vulnerable to Dovish RBNZ

Fundamental Forecast for the British Pound: Neutral

The Reserve Bank of New Zealand’s (RBNZ) first interest rate decision for 2017 may keep NZD/USD afloat as the central bank is widely expected to keep the official cash rate at the record-low of 1.75%, but the higher-yielding currency stands at risk of giving back the advance from earlier this year should Governor Graeme Wheeler and Co. highlight a dovish outlook for monetary policy.

After delivering a 25bp rate at its last interest rate decision for 2016, the RBNZ is likely to endorse a wait-and-see approach for the foreseeable future as ‘current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range.’ As a result, the 1.3% expansion in New Zealand’s 4Q Consumer Price Index (CPI) may encourage central bank officials to adopt an improved outlook for the region, with the New Zealand dollar at risk of extending the rally from the previous month should the central bank show a greater willing to gradually move away from its easing-cycle.

However, the central bank may keep the door open to further embark on its easing-cycle as the upward pressure in the New Zealand dollar exchange rate ‘continues to generate negative inflation in the tradables sector.’ In turn, Governor Wheeler may prepare New Zealand households and businesses for another rate-cut as ‘significant surplus capacity exists across the global economy,’ and the 0.8% expansion in New Zealand Employment may do little to alter the RBNZ’s cautious outlook as wage growth remains depressed. In turn, a slew of dovish rhetoric from Governor Wheeler and Co. may spur near-term headwinds for the New Zealand dollar as the central bank appears to be in no rush to remove its accommodative policy stance.

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New Zealand Dollar Resilience Vulnerable to Dovish RBNZ

With that said, NZD/USD may consolidate ahead of the RBNZ’s policy meeting as it remains stuck within the narrow range carried over from the end of January, but the pair may continue to threaten the descending channel carried over from the previous year and make a more meaningful run at the November high (0.7403) should the policy statement boost interest rate expectations. In contrast, dovish rhetoric from the RBNZ may keep the pair capped by the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7350 (61.8% expansion), and the Relative Strength Index (RSI) may continue to respond to the bearish formation from June amid the deviating paths for monetary policy. - DS