US Dollar Rebound in the Balance as All Eyes Turn to Jackson Hole

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US Dollar Rebound in the Balance as All Eyes Turn to Jackson Hole

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar impressively resilient even as politics sour risk appetite
  • Jackson Hole symposium may set the stage for QT, another rate hike
  • Combative White House may yet derail the US currency’s recovery

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The US Dollar managed to navigate last week’s politically charged landscape without sacrificing the upward trend launched from early August lows against the G10 FX majors. That seems like quite a feat considering that the S&P 500 – a benchmark for market-wide risk appetite – plunged to a one-month low and seemingly broke the rising trend started in mid-April.

The markets have become used to a Fed that is loath to pull back on stimulus when overall market sentiment sours. Officials have been careful not to trigger a panic that might spill over into the real economy and derail the fragile recovery after the 2008-9 financial crisis. Indeed, they have taken to giving themselves the better part of a year to prepare the public for major policy turns.

Investors seem to suspect that this time will be different. The priced-in probability that the FOMC will make good on its June forecast for three rate hikes in 2017 actually rose from 26 to 36 percent over the past week. Perhaps this is because members of the rate-setting committee have started voicing concerns about frothy asset prices, which may mean that they are willing to stomach a substantive de-risking.

This ought to make for an interesting week ahead as a lull in top-tier economic news flow directs all eyes to the Fed’s annual policy conference in Jackson Hole, Wyoming. The US central bank has frequently used the gathering as the venue of choice to announce major new policy initiatives. Friday’s speech by Chair Janet Yellen may aim to do precisely that.

Minutes from July’s FOMC meeting revealed that the Fed is looking to begin unwinding its balance sheet at “an upcoming meeting”. Of the three such conclaves still ahead this year, those in September and December seem like the only plausible options in so much as they will feature detailed forecast updates and a press conference where the Chair can explain any significant changes.

The best-case scenario for the greenback would see Yellen setting the stage to begin so-called “quantitative tightening” (QT) next month. That would leave room for another rate hike just before year-end if all goes well and the “idiosyncratic” forces holding down inflation evaporate, as the Fed seems to believe they will. Vague rhetoric on QT prospects and ebbing confidence in reflation are likely to hurt the US currency.

As ever, political volatility is a wildcard. The markets cheered Friday’s dismissal of controversial Trump advisor Steve Bannon in the wake of last week’s events in Charlottesville, Virginia. The bombastic billionaire-in-chief can hardly be expected to kowtow to critics however and may return to the offensive – both literally and figuratively – at a rally in Arizona on Tuesday.

Euro Awaits Heavier Calendar to Break the Summer Lull

News events, market reactions, and macro trends.

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Euro Awaits Heavier Calendar to Break the Summer Lull

Fundamental Forecast for EUR/USD: Neutral

- Last week was fairly quiet, given that the Euro only gained or lost more than 1% versus one currency.

- The Euro may be at a bullish extreme, according to three separate sentiment indicators, including our in-house sentiment reading, the IG Client Sentiment gauge.

- Review our Q3’17 EUR/USD forecast as make our way through mid-August.

The Euro had a quiet week last week, only gaining or losing more than one percent versus one major currency (EUR/NZD finished up by +1.72%). Amid a quiet economic calendar and geopolitical tensions rising between North Korea and the United States, the Euro was more or less rudderless and simply along for the ride with whichever way the winds were blowing. To this end, the worst performing EUR-cross was EUR/JPY, which dropped by -0.96%.

In the days ahead, however, a much heavier economic calendar should bring some much needed volatility to the Euro as the rest of the month could be quieter (we are moving into the second half of August after all). In recent weeks, European economic data has slipped: the Euro-Zone Citi Economic Surprise Index is down from +36.3 to +12.6 over the past four-weeks.

Overall, the data due could take a mediocre tone fitting in with the recent deterioration in momentum, according to consensus forecasts. While Q2’17 GDP readings from across the region may actually perk up, data that is more of the leading variety than backward looking is expected to disappoint. Of note, July inflation figures could show further deterioration.

A miss in the July inflation data could highlight the big issue moving forward for the Euro: the Euro itself. Euro strength begets slower rates of inflation. The reality in FX markets is that with inflation so low, the Euro’s strength may only be tolerated for so long. The ECB’s technical assumption for EUR/USD in 2017 is 1.0800; it closed last week just above $1.1800.

As we’ve previously stated, a few more months of a strong Euro, middling energy prices, and persistent underperformance in inflation readings, and it’s easy to envision the ECB taking issue with the market’s hawkish interpretation of the policy adjustments being made.

Market positioning would dictate that any weakness in EUR/USD in the near-term would be of the profit taking variety. Even though positioning has moderated in recent weeks, the Euro long trade remains crowded (relatively speaking). According to the CFTC’s latest COT report, there were 93.7K net-long contracts held by speculators in the futures market for the week ended August 1, thehighest level since the week ended May 3, 2011 (when EUR/USD peaked just below 1.5000).

See our Q3’17 Euro forecast - check out the DailyFX Trading Guides.

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

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Yen Remains Strong as Risk Aversion Trumps GDP: Inflation on Deck

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Yen Remains Strong as Risk Aversion Trumps GDP: Inflation on Deck

Fundamental Forecast for JPY: Neutral

Talking Points:

The Japanese Yen is moving towards the close of what was an interesting week for the currency. While there were very few Japanese economic drivers to speak of, the larger overall theme of risk aversion continued to show in some very key areas such as U.S. stocks. This helped to keep the Yen strong against most major currencies as the JPY ran-up to fresh highs, including a print of a fresh four-month low in USD/JPY early in the U.S. session on Friday before buyers responded to push higher off of the lows. Next week brings a key piece of Japanese data on Friday morning (Thursday night in the U.S.) with the release of July inflation figures.

As we discussed last week, the big drivers for the Japanese currency largely emanated from outside of Japan. A burgeoning up-trend off of last week’s lows in USD/JPY in the early portion of this week was eradicated on Wednesday after the release of FOMC meeting minutes. The one high-impact Japanese print on the calendar for the week was GDP, released on Monday morning (Sunday evening in the U.S.). GDP for the second quarter came-in at a very respectable 4%, well-above the expectation for 2.5% annualized growth. While this would normally bring on some element of JPY strength under the presumption that stronger growth would bring stronger inflation, which could eventually motivate the BoJ away from their gargantuan stimulus program; that theme didn’t show up at all.

The Yen weakened in the early portion of this week after this robust GDP print, and this was likely more-related to the easing of risk aversion after last week’s heightened worries around North Korea. U.S. stocks popped-higher on Monday, and held gains on Tuesday and going into Wednesday; mirroring the move of weakness in the Japanese Yen, even despite this stronger-than expected GDP report that opened the week. But after those FOMC meeting minutes were released on Wednesday, the tone changed: Yen strength showed-up again, stocks sold off, and we rallied off the lows as we move towards week-end.

This highlights the fact that there is much more at work in the Yen right now than just Japan. As we discussed last week, long Japanese Yen is likely one of most attractive venues under environments of continued global risk aversion. And the reason isn’t necessarily because investors ‘feel’ safer in the Yen, or in Japan; but more of what this means for the QE-driven trade sponsored by the Bank of Japan over the past five years. The massive stimulus outlay from the BoJ combined with negative rates make the Yen very attractive as a funding currency for carry trades. And in a solid environment, positive carry can be a fairly attractive way for traders to build their approaches: Borrow cheap Yen with weak rates, and then buy a stronger currency with a higher rate and pocket the difference for the trouble. This is why pairs like EUR/JPY and GBP/JPY flew so high after the announcement of ‘Abenomics’ in 2012: It wasn’t that something ‘great’ was going on in the U.K. or Europe. But the Bank of Japan essentially told markets that they’d help to fund carry trades, and this got traders excited around the prospect of Yen weakness on the back of a low rates regime.

This worked for a while. We even saw inflation run above the BoJ’s 2% target in 2014 after this program had been in force for a little over a year. But to the BoJ’s dismay, this was a fleeting observation as inflation rates sunk lower in 2015 as worries began to build around China. Inflation spent the rest of 2015 and the first half of 2016 dwindling-lower, eventually falling below zero, again, as the decades-long struggle with falling prices looked set to continue for the Japanese economy. In October of last year, inflation went positive, and since then the rate of inflation has tenuously remained above zero with a slight build showing over the past few months. Inflation rose to .4% in March after a .2% print in February. After two more months at .4%, markets are looking for a similar print of .4% at next week’s Japanese CPI release. We can see a higher-degree of sensitivity in the Yen to this inflation print opposed to what was seen against that robust GDP number earlier this week. Beats of the .4% expectation will likely elicit a touch of JPY-strength, which a fall below .4% could bring on the sellers as the hope remains that the BoJ will remain ‘pedal to the floor’ with QE until that 2% inflation target comes into view.

Likely – the bigger overall theme of global risk aversion will continue to play a key role here. Next week brings a key event relevant to this topic, as the Jackson Hole Economic Symposium kicks-off and goes into next weekend. If we do see markets stepping back from the proverbial ledge, Yen weakness could remain an attractive theme under the expectation for the BoJ to remain one of the more dovish global Central Banks. If we do see risk aversion continuing to develop, long Yen will probably remain as one of the more attractive vehicles to work with that theme. Traders will likely want to direct these trades away from what’s become an extremely messy U.S. Dollar, and EUR/JPY and GBP/JPY can remain as attractive candidates for this multi-variant theme, as we discussed in our Analyst Pick last week.

The forecast for next week will remain at neutral on the Japanese Yen.

--- Written by James Stanley, Strategist for

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GBP: Another Difficult Week Coming Up

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GBP: Another Difficult Week Coming Up

Talking Points:

  • GBPUSD has been trending downwards since the start of August and that drift lower will likely continue.
  • The British Pound has also lost ground against both the Euro and the Japanese Yen, and here too it shows little sign of rallying.
  • On the economic front, revised second-quarter GDP figures are the ones to watch.

Check out our GBP Trading Guide: it’s free and has been updated for the third quarter of 2017

Fundamental Forecast for GBP: Bearish

With the British Pound trending lower against the US Dollar, Euro and Japanese Yen throughout the month of August so far, buying the currency is currently only for the brave. While corrections and consolidation are perfectly possible, further weakness will likely continue longer-term


Against the Dollar, for example, the Pound has retreated from a high of 1.3268 on August 3 to 1.2857 in late European business Friday. At that level it is below its 20-day, 50-day and 100-day moving averages, but is not yet oversold judging by the 14-day Relative Strength Index.

Chart: GBPUSD Daily Timeframe (May 1 – August 18, 2017)

GBP: Another Difficult Week Coming Up

Chart by IG

Technicals aside, there was a mixed bag of data last week. The headline rate of inflation was unchanged at 2.6% in July whereas a small uptick to 2.7% had been expected. Average earnings grew by more than predicted, taking some of the pressure of the hard-pressed consumer, and retail sales grew by more than expected on a month/month basis though they were lower than predicted year/year.

The overall impact on the currency was minimal, and there was also little response to the UK Government’s latest Brexit position papers on subjects like the border between Northern Ireland, which is part of the UK, and the Republic of Ireland, which will remain an EU member. While important, these papers are not seen as market-moving.

In the coming week, the key statistic will be the second reading of second-quarter GDP, which analysts will be watching for any deviation from the first estimates of 0.3% growth quarter/quarter and 1.7% year/year. Also on the calendar are the public finances on Monday and the Confederation of British Industry’s industrial and retail surveys on Tuesday and Thursday respectively.

Unlike Janet Yellen and Mario Draghi, Bank of England Governor Mark Carney will not be attending the Jackson Hole symposium and while his deputy Ben Broadbent will be there he will not be speaking. There is likely, therefore, to be little further guidance this week on the course of UK monetary policy in the months ahead.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at

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Gold Prices Rally to Fresh Yearly ahead of Jackson Hole

Short term trading and intraday technical levels

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Gold Prices Rally to Fresh Yearly ahead of Jackson Hole

Fundamental Forecast for Gold:Neutral

Gold prices are softer this week with the precious metal down 0.30% to trade at 1285 ahead of the New York close on Friday. The declines come amid a spike in market volatility with the major U.S. equity indices lower on the week. Ongoing turmoil within the White House and uncertainty regarding whether President Trump will be able to push through business friendly fiscal reforms have begun to weigh on markets.

Gains in bullion prices have also been supported by escalating geo-political threats with the ongoing North Korean showdown and terrorist attacks in Spain further fueling demand for the perceived safety of the yellow metal. Looking ahead, these headline risks will continue to weigh on broader market sentiment.

All eyes will be on Jackson Hole Wyoming next week for the annual monetary policy symposium. Fed Chair Janet Yellen will be joined by ECB President Mario Draghi to discuss challenges confronting monetary policy as global central banks look to begin the normalization process. With both central banks still struggling to achieve their baseline 2% inflation target, traders will be looking for the tone of the commentary as it pertains to interest rates moving forward (as well as the off-load of the Fed’s massive balance sheet). As it stands, markets have seemingly priced out the probability of any additional rate-hikes in 2017.

Gold Prices Rally to Fresh Yearly ahead of Jackson Hole
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +1.64 (62.1% of traders are long)- bearishreading
  • Long positions are 11.3% higher than yesterday but 9.9% lower from last week
  • Short positions are 11.5% higher than yesterday and 28.3% 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 fall. Yet traders are less net-long than yesterday and compared with last week and the recent changes in positioning warn that the current Gold price trend may push higher despite the fact traders remain net-long.

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Gold Prices Rally to Fresh Yearly ahead of Jackson Hole

Earlier this week we postulated that gold might be on course to post fresh yearly highs after testing monthly open support mid-week. The subsequent rally failing at 1300 before pulling back sharply. Price response to this level leaves the immediate risk lower heading into next week, but the broader outlook remains weighted to the topside while above 1251. A topside breach eyes subsequent targets at 1321/25.

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Gold Prices Rally to Fresh Yearly ahead of Jackson Hole

Gold Prices Rally to Fresh Yearly ahead of Jackson Hole

A closer look at price action sees gold holding within the confines of a well-defined ascending channel formation off the July lows. A rebound off channel support early this week saw prices break to fresh yearly highs on Friday – but not before posting a massive 4-hour reversal candle just ahead of channel resistance.

Heading into next week, the threat remains for a deeper pullback here but the broader focus remains higher while channel support /1278 with bullish invalidation set to the monthly open at 1268. Bottom line: we’re shifting our weekly bias to neutral heading into next week while noting a constructive outlook while within this channel.

Previous Forecast: Gold Prices Fueled by Fire & Fury (8/12)

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

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USD/CAD to Eye 2017-Low on Dovish Fed as Focus Shifts to Jackson Hole

Central bank policy, economic indicators, and market events.

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USD/CAD to Eye 2017-Low on Dovish Fed as Focus Shifts to Jackson Hole

Fundamental Forecast for Canadian Dollar: Bullish

USD/CAD may continue to give back the rebound from the August-low (1.2413) as the Federal Reserve scales back its hawkish outlook for monetary policy, while the Bank of Canada (BoC) appears to be on course to deliver another rate-hike in 2017.

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The Federal Open Market Committee (FOMC) Minutes seem to have rattled interest rate expectations as many officials ‘saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.’ In turn, Fed Fund Futures now highlight growing expectations for a hold in December, and the fresh headlines coming out of the Economic Symposium in Jackson Hole, Wyoming may continue to dampen the appeal of the greenback should an increased number of FOMC officials show a greater willingness to carry the current policy into 2018.

However, the U.S. dollar may face a more bullish fate as ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon,’ and talks of unwinding the quantitative easing (QE) program at the September meeting may generate a near-term rebound in USD/CAD as the BoC is expected to retain the current policy during the same period.

Governor Stephen Poloz and Co. may stick to the current stance on September 6 after raising the benchmark interest rate for the first time since 2010, but the pickup in Canada’s Consumer Price Index (CPI) may encourage the central bank to prepare households and businesses for higher borrowing-costs as ‘the factors behind soft inflation appear to be mostly temporary.’ In turn, the BoC may continue to change its tune over the coming months, and the key developments coming out of the Canadian economy may fuel the shift in USD/CAD behavior as ‘the output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).’

USD/CAD Daily Chart

USD/CAD to Eye 2017-Low on Dovish Fed as Focus Shifts to Jackson Hole

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Failure to push back above the former-support zone around 1.2770 (38.2% expansion) to 1.2780 (38.2% expansion) bring the downside targets back on the radar especially as USD/CAD fails to preserve the upward trend from July. With that said, a bear-flag formation appears to materializing, with the next downside hurdle coming in around 1.2510 (78.6% retracement) to 1.2540 (61.8% expansion) followed by the Fibonacci overlap around 1.2410 (100% expansion) to 1.2440 (23.6% expansion), which lines up with the 2017-low (1.2413).

USD/CAD to Eye 2017-Low on Dovish Fed as Focus Shifts to Jackson Hole

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Retail trader data shows 65.2% of traders are net-long USD/CAD with the ratio of traders long to short at 1.87 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.34477; price has moved 6.5% lower since then. The number of traders net-long is 12.0% lower than yesterday and 16.4% lower from last week, while the number of traders net-short is 5.6% lower than yesterday and 31.9% higher from last week.

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Becalmed Australian Dollar May Need Left-Field Impetus

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Becalmed Australian Dollar May Need Left-Field Impetus

Fundamental Australian Dollar Forecast: Neutral

  • This isn’t a week replete with top-line Australian economic data. Unusually, there are none.
  • That will probably leave investors to gnaw old themes
  • Which in turn will probably mean that the currency remains where it is

Get tips and live coverage of major Australian Dollar developments at the Daily FX webinars.

The Australian Dollar market may be stuck with familiar themes this week.

That’s because the economic data schedule is unusually but completely bereft of first-tier Australian numbers. It’s also rather short of the kind of heavyweight international figures which could send cross-market ripples the Aussie’s way.

So the currency is likely to remain in its becalmed state unless something unexpected comes storming out of left field, a possibility we can of course never fully discount.

But to stick with what we might call “known knowns”, we learned last week that monetary-policy makers at the Reserve Bank of Australia were relatively upbeat on Australia’s chances in a recovering global economy at their last meeting. However, they were also resolutely fretful about Aussie consumers’ indebtedness and as worried as ever about the effects of a strong currency on the domestic economy.

Neither of these worries are in any way new. Both crop up on the RBA’s downside-risk list with metronomic regularity. We also learned that, while Australian employment growth was better than forecast in July according to official figures, there was a worrying lurch lower for full-time positions which took some gloss off the headline.

But there has been enormous volatility in the full-time/part-time breakdown in recent months, to the point where it would hardly shock the markets to see July’s loss of 20,000 or so full-time workers fully made good in August. Still, for now question marks glower over the quality of job creation if not its quantity.

So where does this leave the Australian Dollar? Well, probably once again caught between a market which would quite like to buy it, assuming risk appetite doesn’t take another battering, and a central bank ever-more vocal about the baleful effects of currency strength.

That means it just must be a second, straight weekly neutral call.

Becalmed Australian Dollar May Need Left-Field Impetus

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

NZD Boosted by Risk-on Sentiment But Weakness Remains

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NZD Boosted by Risk-on Sentiment But Weakness Remains

Talking Points:

  • The RBNZ will be closely watching the recent Kiwi uptick.
  • The latest quarterly producer price data was mixed.
  • The downside still looks the path of least resistance for NZD/USD.

Fundamental Forecast for NZD: Neutral

We remain neutral on the New Zealand - with a bias to sell any strong rallies – despite the Kiwi gaining on the back of improving market sentiment. The high yielding currency normally benefits when markets turn ‘risk-on’ and the recent easing of tensions between the US and North Korea saw NZD buyers return. The RBNZ however will be watching the currency closely and has in the past said that it would act if needed to contain any unwanted currency appreciation.

The latest PPI figures showed a mixed message with input costs rising by 1.4%, compared to last quarter’s 0.8%, while output costs rose by 1.3% against a prior quarter’s 1.4%.

A look at the chart below shows the NZD/USD forming a head and shoulders pattern which normally points to the market turning lower. Resistance is likely to be found around the 0.7360 level ahead of the 23.6% Fibonacci retracement level at 0.7383.

NZD Boosted by Risk-on Sentiment But Weakness Remains

Retail trader data shows a ratio of traders short to long at 2.04 to 1. In fact, traders have remained net-short since May 24 when NZDUSD traded near 0.68435; price has moved 7.0% higher since then. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias and leaves us on the side-lines for now.

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--- Written by Nick Cawley, Analyst

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