Forecasts

US Dollar Aims to Extend Rally on FOMC Minutes, Powell Speech

Fundamental analysis, economic and market themes

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US Dollar Daily chart

FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

  • Fed freshmen testimony drives US Dollar to five-month high
  • May FOMC meeting minutes may boost rate hike bets further
  • Chair Powell may help USD advance with Riksbank speech

See our quarterly US Dollar forecast to learn what will drive prices through mid-year!

The US Dollar returned to the offensive as comments from incoming Fed policymakers Richard Clarida and Michelle Bowman at their Senate confirmation hearings bolstered a hawkish shift in policy bets, as expected. It rose to a five-month high against its top counterparts as the futures-implied 2019 rate hike path steepened and the spread between 10- and 2-year Treasury bond yields widened by the most since January.

The week head brings ample fodder for continued speculation. Minutes from the May 2 meeting of the rate-setting FOMC committee take top billing. The policy statement released following the sit-down reinforced the status quo three-hike projection for 2018, but an upgrade in rhetoric on inflation signaled scope for a more aggressive tightening cycle in the years to follow.

Traders will parse officials’ comments for clues about what this actually means in practice. As it stands, market pricing implies a lean toward two rate hikes in 2019. The Fed’s own forecast – last updated in March – calls for three. A hawkish tone that pushes markets’ view closer to the central bank’s position is likely to offer the greenback another upward nudge.

The spotlight then turns to speech from Fed Chair Jerome Powell, who is due to discuss financial stability and central bank transparency at conference celebrating the 350th anniversary of the Risksbank in Stockholm. He is likely to signal that spillover risks are unlikely to deter the Fed from pursuing tightening, echoing remarks made at an SNB/IMF event earlier this month. That too stands to benefit the US currency.

FX TRADING RESOURCES

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

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



Euro Forecast: EUR/USD Decline May Not Be Finished

News events, market reactions, and macro trends.

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Euro Forecast: EUR/USD Decline May Not Be Finished

Fundamental Forecast for EUR/USD: Neutral

- The Euro depreciated against all of the other seven major currencies, with EUR/CHF (-1.64%) and EUR/USD (-1.45%) leading the decline.

- The preliminary May Eurozone PMI readings aren’t set to improve, giving little reason for the Euro’s downtrend to end.

- The IG Client Sentiment Index is once again suggesting to sell EUR/USD after recent shifts in speculative positioning.

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

The Euro was the worst performing major currency last week, with EUR/CHF (-1.64%) and EUR/USD (-1.45%) leading the decline. A revision lower to the final April Eurozone CPI report coupled with signs that the United States would avoid significant trade disputes with China sapped demand for the low yielding Euro.

Concurrently, the fundamental backdrop for the Euro remains rather weak. The Citi Economic Surprise Index, a gauge of economic data momentum, closed last week at -91.7, still deep in negative territory (although no longer at its weakest reading since September 2011). This is a slight improvement from a week ago (-97.9) but not over the past month (-90.0).

Inflation expectations aren’t doing much better than data momentum, both of which have been steadily eroding in recent weeks. The 5-year, 5-year inflation swap forwards finished Friday at 1.702%, down from 1.714% a week earlier. Inflation expectations peaked this year on January 22, when the 5-year, 5-year rate was 1.774%.

It would seem that this would be as good as a time as ever for inflation expectations to turn higher (if they intend to in the near-term), given that Brent crude oil prices having been rallying and Euro strength isn’t as pronounced as it once was (Euro trade-weighted index is only up +4.77% from a year earlier; a month ago, it was closer to +9%).

The week ahead promises few opportunities for the bearish narrative that has enveloped the Euro over the past several weeks to disappear. Externally, any resolution to the purported China US trade war would seemingly be US Dollar positive, mirroring the initial negative reaction to when the trade cooperation became strained.

Internally, the only significant data due out are the initial May PMI readings. The mix of individual country releases at the start of the week will culminate in stagnant readings in the cumulative Eurozone PMIs due out on Wednesday (no change or declines are anticipated). Elsewhere, political risk is on the rise now that Italy has a new government: Italian bond yields and credit default swap spreads have been rising since the news broke in early-May.

Lastly, there is still a notable net-long Euro position in the futures market. Speculators still held +115.1K contracts through the week ended May 15, a -24% decline from the all-time high set during the week ended April 17 (+151.5K contracts). While this is becoming a less difficult a situation for the Euro, the path of least resistance for the Euro remains towards weakness if positioning trimming continues.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- 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.



Yen Weakness in the Spotlight with Japan Inflation Numbers On Deck

Price action and Macro.

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US Dollar versus Japanese Yen Daily Chart

Fundamental Forecast for JPY: Bearish

Talking Points:

Want to see how other traders are approaching USD/JPY? Check out our IG Client Sentiment indicator.

USD/JPY Holds Resistance at 110.00, Bulls Show at Higher-Lows

Japanese Yen pairs saw quite a bit of back-and-forth action this week, with USD/JPY continuing the range-like behavior from the week prior. GBP/JPY did see some fireworks, although that was more-likely coming from dynamics in the British Pound. While USD-bulls remained in-force into Thursday’s US CPI release, USD/JPY put in another failed test at the 110.00 level. This had also happened last week, thereby helping to produce a double top formation in USD/JPY at a key area of psychological resistance.

USD/JPY Four-Hour Chart: 110.00 Resistance Holds as Buyers Show at Higher-Lows

US Dollar versus Japanese Yen technical analysis

Chart prepared by James Stanley

Kuroda Sets the Tone

There were no high-impact announcements on the economic calendar this week out of Japan this week, and the more noteworthy items came from speeches with BoJ Governor Haruhiko Kuroda. Mr. Kuroda offered comments on a number of topics this week, key of which was a call on the Japanese government to step up structural reforms to allow for a more growth-friendly economic backdrop. This is the third pillar of the ‘Abenomics’ approach to ending the decades-long struggle that the Japanese economy has had with deflation; and this is a part of the strategy that we haven’t seen addressed in some time. Kuroda specifically mentioned that Japan has more work to do on deregulation, and this is likely pointing to a heavily-regulated labor market along with heavily-regulated industries in Japan like healthcare and agriculture.

Of specific interest to short-term dynamics in the Japanese Yen, Mr. Kuroda also touched on the topic of stimulus exit earlier in the week. While the Bank of Japan was nearing a Euro-like scenario earlier in the year, with strong growth in inflation threatening to push the bank away from a massive stimulus program; Mr. Kuroda addressed this head-on when he said that should conditions continue to improve, the BoJ will start to debate stimulus exit. While this may not be an earth-shattering pronouncement, nor did Mr. Kuroda offer any type of outlook as far as timing, the fact that he was willing to touch on this topic speaks volumes. The ECB appeared to try to avoid this as much as possible in 2017, and it merely led to more strength as that omission was taken ominously. It also shows that the BoJ is likely going to remain pedal-to-the-floor until absolutely necessary, and this brings focus on to next week’s data.

Japanese Inflation Data is On Deck

Inflation has been a pain point for the Japanese economy for almost 30 years now. After the Plaza Accord in 1985, the Yen went on a bout of strength that lasted for the next two decades and then some; and along with that currency strength came a lack of inflation and in some cases, deflation. The saga that Japan had with dismal rates of inflation is what helped to produce the backdrop for ‘Abenomics’ and the ‘Three Arrows’ approach; and now six years after Shinzo Abe’s election, the country remains full-force on the economic stimulus front.

In December, a bit of hope began to show when inflation printed at a 34-month high of one-percent. That trend continued in January with inflation spiking up to 1.4%, and then again in February when inflation came-in at 1.5%. In short order, Yen-strength had become a very noticeable theme, and given the scope of inflation gains, the prospect of additional Yen-strength remained as we were nearing a situation similar to what the Euro experienced last year.

That theme caught some respite in March when inflation numbers softened, and this helped the Yen to pullback. March inflation came-in at 1.1%. On Thursday evening of next week, we get Japanese inflation numbers for the month of April. Should this continue to show softening in inflation with a print of one-percent or less, the door for Yen-weakness re-opens.

Japan Headline CPI Softens in March After January/February Spike

Japanese CPI

Chart prepared by James Stanley

Perhaps more troubling on the inflation front was Core CPI readings. After starting 2017 by flipping into positive territory, this indicator continued to grow throughout the year, printing for three consecutive months at .9% as we opened into 2018. This came-in at one-percent in February, further fanning the flames of fear around the BoJ being forced away from stimulus. But this too softened in March with Core CPI dropping back to .9%. That’s the big number to watch for on Thursday, as another read at .9% or less keeps that door for Yen-weakness wide-open.

Core CPI Falls Back to .9% in March

Japanese CPI

Chart prepared by James Stanley

Next Week’s Forecast

The forecast for next week on the Japanese Yen will be set to bearish. We looked at a related setup in USD/JPY in the article entitled, FX Setups for the Week of May 14, 2018.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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

Contact and follow James on Twitter: @JStanleyFX



GBPUSD Forecast: Plethora of UK Data to Dictate Near-Term Direction & BoE Policy

Fundamental analysis, news events, market reactions and macro trends.

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GBPUSD Forecast: Plethora of UK Data to Dictate Near-Term Direction & BoE Policy

GBPUSD Analysis and Talking Points:

  • Pound sees Steady Week to Find Base at 2018 Lows
  • Near term GBPUSD direction and BoE policy to be dictated by deluge of UK data

Fundamental Forecast for GBP: Neutral (Next Week’s Range: 1.3370-1.3650)

Relative to the past month, where GBP had fallen over 6%, the Pound saw a somewhat steady week which had largely been dictated by the continued rally in the USD. As such, GBPUSD gave up the 1.35 handle, forming a base at YTD lows around 1.3450. Elsewhere, the UK jobs reports indicated that the labour market continues to remain robust, while average wages ticked up to 2.9%, which saw real earnings rise to 0.4%.

Economic Data to Dictate GBP and BoE Policy

As we look ahead to next week’s calendar, a deluge of UK data points, most notably inflation and GDP figures may bring the relative calm to an end. As a reminder, it was last month’s inflation report that caused many investors to rethink a May hike after the headline CPI saw a sizeable drop to 2.5% from 2.7%, which represented a 1yr low. Expectations are for CPI to remain at 2.5%, however, a drop similar to that of last month would be a blow for GBP bulls looking for an August rate hike, which is currently perceived as a coin toss between a hike/hold.

GBPUSD Forecast: Plethora of UK Data to Dictate Near-Term Direction & BoE Policy

Source: Thomson Reuters (Bank of England Rate Hike Expectations)

GBP traders will also be able to digest the latest retail sales data, which saw a sizeable decline last month due to temporary weather-related factors, as such, this latest reading could see a rebound. However, if survey indicators are anything to go, a recovery is somewhat doubtful. Finally, the week will close out on the second estimate to Q1 GDP, which is expected to be confirmed at 0.1% (weakest growth in 5yrs).

Next week’s Economic Calendar

GBPUSD Forecast: Plethora of UK Data to Dictate Near-Term Direction & BoE Policy

Overall Weekly Outlook is Neutral

For this week, we continue to remain neutral on GBPUSD, price action will of course be dictated by the incoming data with the largest focus on inflation. If CPI does miss expectations then this could potentially open 1.3275-1.33 support. However, a match on consensus should see GBPUSD continue to hold the 1.3450 base.

On a longer time frame we noted previously that the recent pounding may allow for long term GBP bulls to find tactical upside at these relatively cheap levels.

GBPUSD Technical Levels

Support

1.3450 (2018 low)

1.33025 (December 2017 low)

Resistance

1.3587 (post-NFP high)

1.3655 (2017 high)

1.3711 (March 1st low)

GBPUSD PRICE CHART 1: DAILY TIMEFRAME (November 2017-May 2018)

GBPUSD Forecast: Plethora of UK Data to Dictate Near-Term Direction & BoE Policy

Chart by IG

GBP TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX



Gold Prices May Fall As Non-Interest Metals Continue Losing Out

Classic technical analysis, macro and economic themes

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Gold Prices May Fall As Non-Interest Metals Continue Losing Out

Gold Price Fundamental Forecast: Bearish

Gold Price Outlook Talking Points:

  • Gold prices came under pressure as the US Dollar and bond yields rose on the whole
  • FOMC meeting minutes and Fed speak can echo this dynamic in relatively sparse week
  • This leaves the door open for gold price consolidation and profit taking on slower days

Trade all the major global economic data live and interactive at the DailyFX Webinars. We’d love to have you along.

By the beginning of last week’s Friday session, gold prices had slumped to their lowest point this year so far. The anti-fiat asset, which bears no interest when holding, was undermined by rising government bond yields. This was not only in the US, but from around the developed world as well in places such as Australia, Canada, the United Kingdom. Yield curves steepened as the spread between US 10-year and 2-year yields widened.

Not surprisingly, the US Dollar rose and too at the expense of the yellow metal. Critical economic event risk was notably sparse, but an upward revision in US retail sales seemed to have fueled some greenback strength. Hawkish Fed monetary policy expectations firmed and Atlanta’s Fed President Raphael Bostic confirmed that up to 4 rate hikes this year could be correct.

All of this points to another week where the markets will probably focus on the expectations of a rise in borrowing costs and bond yields. The US economic calendar docket is similarly sparse when compared to last week apart from one notable exception, the FOMC meeting minutes from its May monetary policy announcement. If the document echoes the central bank’s upgraded view on price pressure, then gold may fall at the expense of the US Dollar.

DailyFX Economic Calendar: (Time Listed in GMT)

Gold Prices May Fall As Non-Interest Metals Continue Losing Out

Aside from that, we will get more Fed speak from notable members such as Chair Jerome Powell himself on Friday. Other policy voters include Raphael Bostic once again on Monday, outgoing Vice Chairman William Dudley (who will be replaced by San Francisco Fed President John Williams) on Thursday and Chicago Fed President Charles Evans at the end of the week. The latter has argued for gradual policy adjustment until the central bank returns to a neutral rate. For more scheduled speakers next week, see the table below.

Next Week’s Fed Speak Calendar:

Fed Speak Calendar

However, given that the docket is sparse, there may be some room for consolidation, especially if traders take profits. Gold has been in a downtrend for just about a month. Do also note that IG Client Positioning for gold shows that 82.0% of gold traders are net-long with the ratio of traders long to short at 4.55 to 1. The combination of current sentiment offers a stronger Spot Gold-bearish contrarian trading bias. With that in mind, the outlook will have to be bearish.

Gold Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

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



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 Fall May Pause, If Only For Lack Of Data

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Australian Dollar Fall May Pause, If Only For Lack Of Data

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar remains in a firm downtrend
  • However, the bears may pause their assault this week
  • There are few data points to give them further clues

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now at the DailyFX Sentiment Page

The Australian Dollar is stuck firmly in a downtrend against its big US brother, which has endured for much of this year. However, within that downtrend AUD/USD has settled into a broad trading range, which may endure through the coming week.

Australian Dollar Fall May Pause, If Only For Lack Of Data

This is not to say that there is any particular reason for Aussie bulls to get excited.

No, they are likely to remain stuck with the same problems they’ve had all year. The Reserve Bank of Australia shows no inclination to raise interest rates from their record lows.

The domestic economy is doing quite well in some respects- employment rose ahead of expectations in last week’s official figures. But, inflation remains below target and the pass through from wages to general pricing seems achingly slow.

The situation still contrasts with a Federal Reserve still apparently keen to push rates up under new Chair Jerome Powell, and a market ever-more convinced of this pushing US Treasury yields higher.

But this week offers quite scant economic numbers, which may give the US Dollar’s apparently broad and relentless uptrend some pause.

Wednesday will bring monetary policy meeting minutes from both the RBA and the Fed, but there’s little reason to expect either central bank to have strayed from their well-known policy lines in meetings which both went as forecast.

Beyond those minutes, there’s a smattering of economic data, perhaps notably US durable goods order levels later in the week. These might see the US Dollar perk up a little if they come in strongly. But, overall, this week may well find AUD/USD bears in need of a pause for breath. A data lull might give it to them.

It’s a neutral call this week. But only just.

Resources for Traders

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

--- Written by David Cottle, DailyFX Research

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



NZD/USD Awaits Fed Speak, Positioning and Perhaps Profit Taking

Classic technical analysis, macro and economic themes

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NZD/USD Awaits Fed Speak, Positioning and Perhaps Profit Taking

New Zealand Dollar Fundamental Forecast: Neutral

Talking Points:

  • New Zealand Dollar depreciated as RBNZ pushed out inflation and rate change forecasts
  • NZD may be at risk of continuing to lose its yield advantage vs. USD on Fed commentary
  • NZD/USD Client Positioning warns prices may turn higher. Profits could also be booked

Have a question about what’s in store for New Zealand Dollar next week? Join aDailyFX Trading Q&A Webinarto ask it live!

The RBNZ certainly left its mark on the New Zealand Dollar last week as the currency depreciated across the board. In May, the central bank held rates unchanged at 1.75% as expected and decreased near-term hawkish monetary policy expectations. The latter was partially as a result of their forecasts for rates rising and inflation hitting two percent both being pushed further out.

Looking at their summary of economic projections on the chart below, you can see that they don’t see inflation reaching the middle of their target range (1% – 3%) until 2021. However, new Governor Adrian Orr expects CPI to hit 2.0 percent in the fourth quarter of 2020. He added that a rate cut could be a ‘valid’ possibility when he spoke at the Parliament Select Committee.

NZD/USD Awaits Fed Speak, Positioning and Perhaps Profit Taking

Prior to this announcement, the central bank has shown us time and time again that they are in no rush to raise rates. With the RBNZ now giving an equally balanced view on where their OCR could go, it looks like they have become more neutral relatively speaking. This also brings us to what could be in store for the New Zealand Dollar next week.

Given the RBNZ’s monetary policy stance, it seems that incoming domestic data may not do much to inspire a dramatic change in rate outlook bets. In fact, the key economic calendar for New Zealand is rather lacking in the week ahead. This leaves the potential for the US Dollar to continue capitalizing on its increasing yield advantage over it. Keep an eye out for Fed speak which will be in no short supply looking at the table below.

NZD/USD Awaits Fed Speak, Positioning and Perhaps Profit Taking

Meanwhile IG client positioning for NZD/USD shows that retail traders are 58.2% net-long with the ratio of traders long to short at 1.39 to 1. However, traders are becoming less net-long compared to the prior week. Thus, recent changes in sentiment do warn that NZD/USD may soon reverse higher.

NZD/USD Awaits Fed Speak, Positioning and Perhaps Profit Taking

With that in mind, the outlook for the New Zealand Dollar will have to be neutral. Keep in mind that NDZ/USD has been in an aggressive downtrend since mid-April. This opens the door for some profit taking which could momentarily keep prices higher.

New Zealand Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

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



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