Dollar to be Jostled by Traders Speculation and Fed Officials Forecasts

Fundamental analysis and market themes.

Connect via:

Dollar to be Jostled by Traders Speculation and Fed Officials Forecasts

Fundamental Forecast for Dollar:Neutral

  • The probability of a rate hike by the end of the year stands at 55.4 percent following last week’s FOMC hold and rate outlook
  • There are plenty of Fed speeches and data due ahead, but it would be difficult to charge a full trend on this mix

The Federal Reserve announced to the market a ‘hawkish hold’ at its policy gathering this past week, and in turn offered little resolution to the market’s conflict over the Dollar’s current richness or cheapness. That makes it difficult to mount a committed speculative run – bullish or bearish – to break the Dollar free of the broad range that has solidified these past 21 months. Gaining a clear bead on rate speculation for the masses will be difficult with both the moderated outlook and limit on key event risk. Meanwhile, there remains an open opportunity/threat for risk trends to finally gain purchase; but the first flush of trouble may not immediately rally Dollar haven seekers.

The Dollar is in a unique fundamental position. On the one hand, the Greenback is the only major currency whose central bank is backing a hawkish lean which implies simultaneously a forward yield advantage in this reach-for-yield environment and a more durable safe haven whose economy is seemingly robust enough to weather removal of accommodation. That keeps the USD steadfast with holding onto the gains made over the past 5 years against all major counterparts. That said, rate speculation has overrun its reasonable economic tempo which has kept a steady drain on bullish interests. What’s more, this advantage persists in a time when investors are far more discerning about the risks taken for slim yield. In turn, this looks like a dubious balance awaiting clarity, similar to the S&P 500.

Though it may lack for a spark with the capacity to singlehandedly revive trend, monetary policy will provide the most abundant fundamental motivation for the Dollar through the coming week. We head into the new trading period with Fed Funds futures pricing in a sparse 19.3 percent probability of a hike on November 2 (just a few days before the Presidential elections) and 55.4 percent chance of a move on December 14 (what would be the one-year anniversary of ‘lift off’). Should these scales change, we can oscillate within the broad range on the ICE Dollar Index (850 points) and EUR/USD (1,225 pips). Currently, the Greenback is trading very near the center of these spans. Breaking the outer boundaries would take a shock or a remarkable consistency in the scheduled event risk.

From the docket, much of the data due ahead doesn’t present the most direct route to changing the monetary policy timetables. Housing data, durable goods orders, the advance trade report and PMIs are economically valuable; but consistently lack for market influence. Two reports stand out above the pack: the PCE deflator and the Conference Board’s consumer sentiment survey. The former is the Fed’s favored inflation report, and most officials agree that this is the point that is subverting the need to tighten more quickly. Headline annual PCE (including volatile items) is at 1.6 percent currently has held below the 2-percent target for four-and-a-half years. The pace of core inflation is a far more restrained 0.8 percent. The sentiment survey is valuable for components that include economic, wage, employment and inflation expectations – which can turn into price pressures down the line.

Compared to the data, the Fed speaking schedule offers more pointed opportunity to sway rate speculation. There are 14 separate speeches scheduled with Chair Yellen, Vice Chair Fischer, bulls and doves all on tap. Yellen’s testimony Tuesday and insight from the dissenters at the last week’s meeting (voting to hike) will carry the most market-moving heft.

Where rate speculation will offer the most proactive market influence, it is important to keep a weathered eye out for those influences that seem inert but can redefine the landscape should they stir. In the list of sidelined themes, risk trends remains a top consideration. The volatility and volume that revived capital markets on Friday the 9th is holding despite the familiar sense of lethargy trying to push back in. At present, any market-wide sentiment shifts immediately ahead would come without clear warning in scheduled events. However, if fear does start to shake loose investors, liquidity is likely to amplify the risk aversion and quickly rally the Dollar on inflows.

Euro Turns to ECB Policy Speeches for Direction This Week

News events, market reactions, and macro trends.

Connect via:

Euro Turns to ECB Policy Speeches for Direction This Week

Fundamental Forecast for Euro: Neutral

- ECB rate cut odds through end of year remain low – that could change this week.

- Only data of interest are Euro-Zone inflation figures due out on Friday.

- See the DailyFX economic calendar for the week of September 25, 2016.

To receive reports from this analyst, sign up for Christopher’s distribution list.

Our forecast called for a ‘neutral’ performance by the Euro last week, and a middling week it was: the best performing cross was only up by +1.12% (EUR/AUD); and the worst performing cross was down only by -0.96% (EUR/NZD). The simple fact is that an absent economic calendar coupled with a waterfall of significant events abroad rendered neutral any Euro-borne influences. However, as we peer into the last week of September and Q3’16, the lack of central bank overhang could see the Euro move back into the spotlight and thus, more volatility to develop.

Like last week, there aren’t many meaningful Euro-Zone data due out over the coming days either, so traders’ collective attention shouldn’t be trained on the economic calendar. That is, at least until Friday, when the September Euro-Zone Consumer Price Index will be released; until then, the calendar is effectively barren. Like last week, any volatility among EUR-crosses throughout the week will be thanks to central bank interference: there are nine ECB speakers (plus the September ECB meeting minutes) between Monday and Thursday without the Bank of Japan or Federal Reserve stealing away attention.

While all of the speakers have the ability to move markets, only a few should leave lasting impressions. Monday is particularly saturated with policymakers, with the ECB’s Couere, Draghi, and Nowotny all slated to speak. End of the week speeches should draw equal fervor, with the ECB’s Chief Economist Peter Praet and President Mario Draghi drawing close attention on Thursday. As is typically the case, President Mario Draghi’s remarks on Thursday should carry the most weight.

Our expectations for President Draghi’s public speeches remains unchanged: he should be more dovish at the margins towards the end of the year. At the September ECB policy meeting, ECB President Draghi stated that the effectiveness, not the size, the QE program may be challenged given the constraints the capital key now poses. “We tasked the relevant committees to work on the smooth implementation and the changes that are needed to ensure the smooth implementation,” he said. Whether or not the ECB is effectively stimulating the market – or if it needs to tweak its operations – should be drawn out from these efforts.

We maintain that, if a shift in the ECB’s operational policy is coming soon (rather than another rate cut), President Draghi is the person to convince markets of its forthcoming nature (rather than Chief Economist Praet, who would be better suited to convince market participants of a forthcoming policy change like a rate cut). While we don’t expect the ECB to do anything substantial before the next round of SEPs are released at the December meeting, we do expect to hear greater discussion regarding the finer points of the QE program. Ultimately, the ECB will have to choose to remove the -0.40% deposit rate threshold for conducting bond purchases (as it’s running out of eligible German debt) or to remove the capital key ratio purchasing parameters (thereby allowing the ECB to purchase more peripheral debt).

What’s been admittedly a quiet month of September, and really, Q3’16, has left us with little new information regarding the state of affairs in the Euro-Zone. We know the recovery is moving forward, but it’s happening at a frustratingly slow pace. As the current situation presents itself, is it necessary for the ECB to cut rates again? No; but the Euro-Zone is in dire need of stimulus efforts. In the vacuum that fiscal policymakers have created, the ECB is truly the only game left in town; so it may only be a matter of time before they’re forced to open the liquidity spigot again. –CV

To receive reports from this analyst, sign up for Christopher’s distribution list

Bank of Japan and US Federal Reserve Keep USD/JPY Downtrend Intact

Quantitative analysis, algorithmic trading, and retail trader sentiment.

Connect via:

Bank of Japan and US Federal Reserve Keep USD/JPY Downtrend Intact

Fundamental Forecast for the Japanese Yen: Neutral

The Japanese Yen rallied for the third-consecutive week versus the US Dollar on a key disappointment from the US Federal Reserve and relative inaction from the Bank of Japan. The week ahead promises substantially less foreseeable event risk, and the USD/JPY may continue its broader trend lower absent material surprises out of a handful of US and Japanese economic data releases.

What should have been a critical 12 hours for the Dollar/Yen exchange rate proved fairly uneventful as the US Federal Reserve kept rates unchanged and the Bank of Japan made few changes to existing monetary policy. Traders continue to believe the US Federal Reserve will raise rates at its December meeting, but there is very little reason to expect fresh policy action out of Bank of Japan. And indeed underwhelming policy from the BoJ will likely work in the Japanese Yen’s favor (against the USD/JPY) given previous expectations of an expansion in the bank’s Qualitative and Quantitative Easing (QQE) policy.

Bank of Japan Governor Haruhiko Kuroda announced two notable changes—officials will target inflation above their previous target of 2.0 percent and will establish a floor for the 10-year Japanese Government Bond yield. Pushing their inflation target higher makes little difference when the bank has thus far been unable to achieve their stated 2 percent target. Setting a specific target for the 10-year JGB yield is the more important and arguably controversial move, however; last week we highlighted why they might target the yield curve, and this is clearly their attempt at doing so.

In theory the BoJ has committed itself to limitless bond purchases if it is to maintain a specific target on the 10-year JGB yield. In practice, however, the targeted bond was already trading just barely above the bank’s target. Nothing will change absent a material rally in JGB’s, and traders are effectively left with the status quo.

Japanese Yen traders are likewise left with an effectively unchanged fundamental outlook, and this in itself favors a continued JPY rally (USD/JPY decline) versus the US Dollar. Only a material break above key range highs would shift our near-term trading bias on the USD/JPY. - DR

GBP/USD to Face Fresh Monthly Lows on Hawkish Fed Rhetoric

Central bank policy, economic indicators, and market events.

Connect via:

GBP/USD to Face Fresh Monthly Lows on Hawkish Fed Rhetoric

Fundamental Forecast for GBP: Neutral

With a slew of Federal Reserve officials scheduled to speak throughout the last full-week of September, the fresh batch of central bank rhetoric may generate new monthly lows in GBP/USD should they boost market expectations for a 2016 rate-hike.

Fed Governor Daniel Tarullo, Dallas Fed President Robert Kaplan, Vice-Chair Stanley Fischer, Chair Janet Yellen, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans, Cleveland Fed President Loretta Mester, Kansas City Fed President Esther George, Philadelphia Fed President Patrick Harker, Atlanta Fed President Dennis Lockhart, Fed Governor Jerome Powell and Minneapolis Fed President Neel Kashkari are all on tap after the Federal Open Market Committee (FOMC) stuck to the current policy at the September 21 interest-rate decision, and we may see a more collective approach to prepare U.S. households and businesses for a December rate-hike as the voting-members appear to be following a similar path to 2015. Indeed, hawkish remarks may prop up the dollar as Fed Funds Futures highlight a greater than 50% for a December hike, but market participants may start paying closer attention to next year’s rotation within the FOMC as central bank officials forecast a lower trajectory for interest rates. In turn, the U.S. dollar stands at risk of facing headwinds over the near to medium-term as Chair Yellen and Co. look poised to further delay the normalization cycle over the policy horizon.

With the Bank of England’s (BoE) next interest-rate decision due out on October13, market participants may see a shift in the policy outlook as board member Kristin Forbes endorses a wait-and-see approach and argues the ‘initial effect on the UK economy of the referendum has been less stormy than many expected.’ In turn, a growing number of BoE officials may also warn that they are ‘not yet convinced that additional monetary easing will be necessary to support the economy,’ and Minouche Shafik may highlight a similar tone next week as the Deputy Governor is scheduled to attend a Bloomberg News event on September 28. The broader outlook for the British Pound remains bearish as the U.K. prepares to depart from the European Union (EU), but the less-dovish remarks coming out of the BoE may limit the downside risk for the sterling especially as Governor Mark Carney rules out a zero-interest rate policy (NIRP) for the region.

GBP/USD to Face Fresh Monthly Lows on Hawkish Fed Rhetoric

GBP/USD stands at risk of breaking down from the triangle/wedge formation carried over from the previous month as the pair trades to fresh monthly lows going into the final week of September, and the Relative Strength Index (RSI) appears to be highlighting a similar dynamic as it fails to preserve the bullish formation carried over from the summer months. In turn, a break/close below the Fibonacci overlap around 1.2920 (100% expansion) to 1.2950 (23.6% expansion) may open up the next downside area of interest around 1.2630 (38.2% retracement), but the pound-dollar may continue to consolidate within a wedge/triangle formation should Fed officials fail to prop up interest-rate expectation.

Gold Prices Post Largest Weekly Rally Since June on Patient Fed

Short term trading and intraday technical levels

Connect via:

Gold Prices Post Largest Weekly Rally Since June on Patient Fed

Fundamental Forecast for Gold:Neutral

Gold prices are markedly higher this week with the precious metal up 2.26% to trade at 1339 ahead of the New York close on Friday. The rally marks the largest weekly advance since mid-June & the largest weekly range since late-July and comes amid a sharp pullback in the greenback, prompted by Wednesday’s Fed interest rate decision.

The FOMC decided to hold interest rates this week as expected but reduced their outlook for future rate hikes. The focus has shifted from the timing of the next rate-hike, to the overall pace of trajectory of monetary policy moving forward. Indeed the updated interest rate dot-plot saw committee members lower expectations for both the 2017 median estimates as well as the longer-run terminal rate. The dollar came under substantial pressure and fueled demand for gold as a store of wealth amid continued easing by the world’s largest central banks. As it stands, Fed Fund Futures remain largely unchanged with expectations still heavily weighted towards a December rate-hike.

Looking ahead to next week, traders will be lending a keen ear to a fresh batch of central bank rhetoric with

Fed Governor Daniel Tarullo, Dallas Fed President Robert Kaplan, Vice-Chair Stanley Fischer, Chair Janet Yellen, Cleveland Fed President Loretta Mester, Kansas City Fed President Esther George and Fed Governor Jerome Powell slated for speeches. Also note we get the third and final revision of 2Q GDP with consensus estimates calling for an uptick in the annualized rate to 1.3% q/q from 1.1% q/q. Stronger US data could weigh on gold prices in the near-term but the technicals suggest that gold is primed for volatility in the days ahead.

Gold Prices Post Largest Weekly Rally Since June on Patient Fed

A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net short Gold- the ratio stands at -1.05 (49% of traders are long)- weak bullish reading. The last time SSI was net-short was on September 7th which is the day the monthly high was registered in price. Note that short positions are 115% above levels seen last week while long positions have fallen 15% over the same time period, suggesting that retail traders are attempting to fade this rally into the range highs. That said, open interest has been building and a continued increase in short-exposure suggests that the risk remains for a breakout of the recent consolidation as prices continue to hold within the initial monthly opening range.

Gold Daily

Gold Prices Post Largest Weekly Rally Since June on Patient Fed

From a technical standpoint, gold is eyeing near-term resistance at 1349 where the September high-day close converges on trendline resistance extending off the yearly high. A breach above the 2016 high-day close at 1355 is needed to validate a breakout in prices with such a scenario eyeing subsequent topside objectives at 1366 & 1380.

Interim support rests at 1330 with our near-term bullish invalidation level now raised to 1315. Bottom line: heading into next week look to fade weakness while above longer-term slope support with a breach above the descending median-line formation needed for resumption of the broader up-trend.

Looking longer-term?

Click here to review DailyFX’s 3Q Gold Projections

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

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

Join Michael for Live Scalping Webinars on Mondays on DailyFX and Tuesday, Wednesday & Thursday’s on SB Trade Desk at 12:30 GMT (8:30ET)

Will Canadian GDP Highlight Continued Pressure in Exports?

Position Trading based on technical set ups, Risk Management & Trader Psychology.

Connect via:

Will Canadian GDP Highlight Continued Pressure in Exports?

Fundamental Forecast for CAD: Bearish

The loonie is sliding, and there is no lack of reasons to blame. In fact, this week we’ve seen new worries added to the reasons for the Canadian economy’s pending weakness similar to what we’ve seen in the Mexican Peso.

The Newest Threat to the Canadian Economy: Donald Trump Presidency

Will Canadian GDP Highlight Continued Pressure in Exports?

Data Courtesy of Bloomberg

Donald Trump is rising in the polls for the November 8 US Presidential Election as shown above. Much of the rise has turned the focus on Donald Trump’s Trade Plans for Canada’s largest export destination, the United States. Last week, Donald Trump did not mince words when he stated that in his view, the North American Free Trade Agreement or NAFTA was the, “worst trade deal in the history of the [U.S.].” The combination of Trump’s America First focus or so-called, protectionist policies has made major U.S. trade partners such as Mexico & Canada have seen their currencies weaken. Unfortunately, the Canadian economy has been unable to dodge the pain of Oil weakness by leaning on trade growth, and manufacturing through a weaker Canadian Dollar.

On Friday, the Mexican Peso dropped to new all-time lows. While the Canadian Dollar is a long way away from all-time lows, there is a significant perceived threat to Canada’s place as a privileged trade partner. Options markets are beginning to see action in the 1.40 strike area that may be indicative or where the FX market would focus should Trump continue to gain in the polls while touting a new Trade Agreement.

Two other components that are not helping the Canadian Dollar recently is the resilient US Dollar and the drop in the price of Crude Oil, which is testing 1-month lows ahead of the September 27 OPEC and Russia meeting in Algeria. The market will likely sell Oil if no agreement is reached to cap production, which would presumably put selling pressure on the Canadian Dollar as continued oversupply would make higher Oil prices less appealing. Lastly, we are less than a week away from Super Wednesday when the Federal Reserve, Bank of Japan, DoE data, & RBNZ is released within 24-hours. Anything that causes the US Dollar to strengthen from here would likely put downward pressure on the Canadian Dollar, and we could see USD/CAD move well above the 200-DMA next, which currently sits at 1.3253.

Economic Data on Deck for Canada This Week

The heavy economic data points this week will take place on Friday, which will be after the dust settles from the international development such as the Central Bank triple-header on September 21. On Tuesday, Bank of Canada Governor Stephen Poloz will be speaking in Quebec City, which will be followed by a press conference. Friday will provide the Canadian Dollar an opportunity to reverse its trend of negative economic surprises with Retail Sales (exp. -0.1 MoM), and the Consumer Price Index (exp. 1.3% YoY.) Because this is the key gauge for inflation in Canada, a disappointment here coupled with positive developments south of the Canadian Border could put further selling pressure on the Loonie.

Aussie Dollar to Fall as Fed-Speak, US Data Fuel Rate Hike Bets

Fundamental analysis, economic and market themes

Connect via:

Aussie Dollar to Fall as Fed-Speak, US Data Fuel Rate Hike Bets

Fundamental Forecast for the Australian Dollar: Bearish

  • Aussie Dollar rose after FOMC flattened rate hike path projections
  • Fed-speak, US GDP and CPI may boost December tightening bets
  • Risk aversion, adverse yield spread shift may see Aussie fall anew

What do past AUD/USD trading patterns hint about where prices are going? Find out here.

The Australian Dollar launched an impressive recovery last week, with the lion’s share of gains coming in the wake of the FOMC monetary policy announcement. A flattening of the projected rate-hike path buoyed risk appetite and sent the sentiment-linked currency higher despite unmistakably hawkish rhetoric from Fed Chair Yellen, who all but promised tightening in December (as expected).

Another quiet week on the domestic front keeps Fed policy bets in focus from here, with extensive commentary from central bank officials due to cross the wires. Remarks from Yellen will take top billing as she testifies before the House Panel on Panel on Banking Supervision. A slew of other speeches from eight regional branch Presidents, two Governors and Vice Chair Fischer are also on the docket.

The US economic calendar will offer plenty of data flow to fuel policy bets as well. Most notably, the final revision of second-quarter GDP figures is expected to see the annualized growth rate upgraded to 1.3 percent while the Fed’s favored core PCE inflation gauge shows inflation accelerated to a six-month high of 1.7 percent in August.

Taken together, all this bodes ill for the risk- and yields-sensitive Australian unit. The promise of a gentler tightening cycle in 2017-18 seems like the Fed’s way of learning from mistakes made in 2016, with policymakers opting to under-promise and over-deliver versus the alternative. If the economy develops as officials expect, a steeper incline may yet emerge in practice.

In the meantime, skeptical investors put the priced-in probability of tightening in December at just 55.4 percent. This leaves ample room for strengthening conviction to have a meaningful impact on asset prices if Fed-speak remains hawkish and economic data complies.

The voting pattern at last week’s FOMC meeting seems to nearly assure the former. As for the latter, Yellen’s assertion that things need only remain the same between now and the end of the year to warrant a hike keeps the bar relatively low. On balance, this hints the Aussie may find its way lower anew as the prospect of nearing stimulus withdrawal weighs on risk appetite and drives an adverse shift in yield spreads.

Will Wheeler Pose a Rate Cut Now or Wait Until November?

Price Action, Swing & Short Term Trade Setups

Connect via:

Will Wheeler Pose a Rate Cut Now or Wait Until November?

Fundamental Forecast for the New Zealand Dollar: Neutral

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

When the RBNZ cut the overnight cash rate in August, few probably would’ve expected what would happen next. While making the cut, RBNZ Governor Graeme Wheeler even indicated that more cuts could be in the cards should oncoming data support it; so this reduction was even accompanied with a dovish backdrop from the head of the RBNZ. But in the days following that rate move, the Kiwi continued to rally higher, moving in the exact opposite direction of what the RBNZ was likely looking for when cutting rates.

This puts the RBNZ in a difficult spot, and could give the bank some additional motivation to kick rates lower again at their upcoming meeting; although this may be a bit presumptuous given that incoming data out of New Zealand hasn’t really been bad enough to warrant rate cuts at two consecutive meetings in two short months. At this point, markets are pricing in less than a 25% chance of a cut at next week’s meeting; and more likely, we’ll probably hear some talking down of the currency rate by Mr. Wheeler as he notes the potential for another cut at their next rate decision on November 9th.

Thickening the drama is the timing of this meeting, as it takes place less than 24 hours after a widely-awaited Bank of Japan rate decision and less than two hours after Chair Yellen of the Federal Reserve finishes the press conference for their interest rate decision. Each of these can have an impact on the RBNZ’s economic outlook given how critical trends in either of those currencies can impact trade and capital flows between these economies and New Zealand: So this is just more reason for the bank to wait to pose another move on rates until later in the year.

November becomes more likely for a potential rate cut as this is when the bank will also be releasing inflation expectations; and this also gives the bank more time to evaluate data in response to the most recent cut in August. The big driver for the Kiwi will likely be how dovish the bank appears considering that the Kiwi-Dollar is trading very near an annual high. So while the RBNZ will likely try to talk this down, it looks more probable that any actual rate cuts may be waiting until November the 9th.

Because of this, we’re going to hold a neutral forecast on the New Zealand Dollar for the week ahead, with a warning of caution around this upcoming RBNZ meeting as the bank will be making the announcement in what could be extremely volatile market conditions in the wake of FOMC.

Free Demo Account Free Trading Guides
Real Time News Open FXCM Account
Trading Signals Live Trading Room