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US Dollar May Rise as Data Flow Drives Rethink of Fed Policy Bets

Fundamental analysis, economic and market themes.

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USD 2-Hour Chart

US DOLLARFUNDAMENTAL FORECAST: BULLISH

  • US Dollar gains as Fed’s Powell unpacks updated policy framework
  • On-trend core inflation clashes with dovish shift in rate hike outlook
  • Incoming news may fuel rebound as ‘data dependence’ is established

Gain confidence in your US Dollar trading strategy with our free guide!

The US Dollar fell for a third consecutive week, succumbing to weakening yield- and haven-based appeal as priced-in Fed rate hike prospects fizzled while risk appetite recovered. Futures markets now predict the central bank will forego tightening altogether in 2019. Meanwhile, the bellwether S&P 500 index has climbed to the highest in a month.

A snapshot of weekly performance obscures what looks to be a critical change in the underlying fundamental narrative however. Markets have been taken with the idea of a dovish turn in the consensus view on the FOMC policy-setting committee for some weeks. Last week, Chair Powell seemed to ratify the idea that – while a change in posture has indeed occurred – this does not imply commitment to a directional bias.

POWELL CHECKS DOVISH TURN IN FED POLICY OUTLOOK

In fact, this seems to be the substance of the adjustment. In the decade following the Great Recession, the Fed sought to reassure markets with policy stability by telegraphing its moves well in advance. With the stimulus withdrawal process underway in earnest and the so-called “neutral” rate in sight, officials have moved into fine-tuning mode: dispensing with pre-commitment and adopting a nimbler approach.

Speaking at the Economic Club in Washington DC on Thursday, Mr Powell spelled out in the clearest terms yet that this need not be inherently dovish. He once again acknowledged a plethora of potential headwinds including trade tensions with China, shaky European politics and the ongoing US government. Critically however, he asserted none of these have materially soured incoming economic data flow.

The Greenback offered a telling response, rising alongside bond yields as the priced-in policy path implied in Fed Funds futures edged away from recent dovish extremes. More of the same followed as December’s CPI report underscored Powell’s point on the very next day. The headline price growth reading ticked lower courtesy of a slump in crude oil, but the core measure held reassuringly on-trend at 2.2 percent.

US DOLLAR EYEING BARRAGE OF ECONOMIC DATA

The calendar is loaded with economic activity data in the coming week. Figures on inventories, retail sales, industrial production, housing starts and building permits are all due. The University of Michigan will also update its US consumer confidence gauge. If traders have finally onboarded what the Fed is saying, the expectation of open-minded data dependence might see any of these stoke outsized volatility.

US economic news flow has sharply improved relative to consensus forecasts since the calendar yearturn. That suggests the setting of analysts’ models has been much too pessimistic, opening door for continued outperformance on incoming releases. That may well prompt a deep rethink of the markets’ no-hike 2019 policy view, setting the stage for the US Dollar to recover.

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

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

US DOLLAR TRADING RESOURCES

Other Weekly Fundamental Forecasts:

Australian Dollar Forecast –Australian Dollar Cannot Bank On Trade Headline Support

Oil Forecast –Fed-Induced Crude Oil Price Rise at Risk as China, US Demand Ebbs

British Pound Forecast –Brexit Vote on Tuesday Will Not End the Current Bedlam



Euro Forecast: Fundamentals Continue to Erode - December CPI on Thursday

News events, market reactions, and macro trends.

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Euro Forecast: Fundamentals Continue to Erode - December CPI on Thursday

Fundamental Forecast for the Euro: Neutral

- The first full week of 2019 was rather quiet for the Euro; no cross finished the week more than +/- 0.83% from where it started.

- Upcoming inflation figures suggest that the ECB may have to use its January policy meeting to underscore its commitment to its ultra-loose monetary policy stance.

- The IG Client Sentiment Indexshows that traders have trimmed their net-long EUR/USD positions in a minor fashion over the past week.

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

The Euro had a middling first full week of 2019, gaining against three currencies while losing ground against four others. The biggest loser, EUR/NZD, was only down by -0.83%, while the top performing cross, EUR/USD, added a mere +0.65%. Absent meaningful data on the economic calendar, the Euro was largely left to the machinations of the other major currencies and developments along their own fault lines: the US government shutdown; the US-China trade war; Brexit; and rising geopolitical tensions in the Syria theater.

Inflation Remains Constrained After Energy Price Decline

The coming week, however, should provide information that will have a direct influence over the EUR-complex. Thursday’s December Eurozone CPI report is the final significant data release before the January European Central Bank Policy meeting (January 24), and the data may provide cover for the ECB to shift its forward guidance (and therefore, rate hike timing) in a more dovish direction.

Even though energy prices have stabilized over the past month – Brent Oil closed this week at $60.59/brl, up from $60.28/brl on December 14, 2018 – inflation expectations continue to trend lower. The 5-year, 5-year inflation swap forward, ECB President Mario Draghi’s preferred market gauge of inflation, has fallen by -6.3-bps over the same time period, from 1.618% to 1.554% on January 11.

Accordingly, traders may want to keep expectations around the Euro tempered this week in the run-up to the December inflation report. While Core CPI is due in on hold at +1.0% y/y, the headline CPI reading is set to decline to +1.6% from +1.9% y/y. The trend of weakening inflation runs contrary to one of the four criteria the ECB considers when adjusting its ultra-loose monetary policy: inflation will be durable and stabilize around those levels with sufficient confidence.

Economic Data Momentum Continues to Weaken

Outside of the December Eurozone CPI report, there’s not much for traders to look to explicitly over the coming days that will influence the Euro beyond a passing reaction. Accordingly, instead of looking at the individual trees, a top-down view of the forest is appropriate. From up here, the view doesn’t look good: weakness in Q4’18 has clearly spilled into Q1’19. The Eurozone Citi Economic Surprise Index ended the week at -88.6, down from -76.2 one month earlier. The story of ongoing economic weakness is really the same story of last year: the Eurozone Markit PMI Composite was 58.8 in January 2018 and closed December 2018 at 51.1.

Net-Short Euro Positioning…Unknown

Finally, in terms of positioning, the CFTC’s COT report for the week ended January 8 showed…nothing. The US federal government shutdown means that the CFTC has shuddered its doors; no reports have been released since December 21, 2018 (per cftc.gov). The most recent figures we have available are three-weeks old at this point. For the week of December 18, speculators had decreased their net-short Euro positions to 53.1K contracts, a drop from 56.3K net-short contracts held previously. Positioning had become interesting once more, but this is not a reliable source at present time. Instead, traders may want to look to the IG Client Sentiment Index for positioning insight.

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.



USD/JPY Flash-Crash Rebound Looks to U.S. Retail Sales for Fuel

Central bank policy, economic indicators, and market events.

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Image of usdjpy chart

Japanese Yen Talking Points

USD/JPY may face range-bound conditions ahead of the next Federal Reserve interest rate decision on January 30 as the central bank adjusts the forward-guidance for monetary policy, but fresh data prints coming out of the U.S. economy may fuel the sharp rebound following the currency market flash-crash should the developments instill an improved outlook for growth and inflation.

Fundamental Forecast for Japanese Yen: Neutral

The Federal Open Market Committee (FOMC) appears to be withdrawing the hawkish forward-guidance as ‘changes in financial conditions appeared to reflect greater concerns about the global economic outlook,’ and the central bank may continue to change its tune over the coming months as ‘participants also reported hearing more frequent concerns about the global economic outlook from business contacts.

It seems as though the Fed is less confident the U.S. economy will be able to tolerate higher interest rates amid the slowdown in global growth, and an increasing number of central bank officials may endorse a wait-and-see approach as Chairman Jerome Powellargues that the FOMC has the ‘ability to be patient and watch patiently.’ In turn, market participants may pay increased attention to Kansas City Fed President Esther George as the 2019 FOMC voting-member is scheduled to speak ahead of the policy meeting, and a batch of cautious comments may produce headwinds for the dollar as U.S. Treasury yields come back under pressure.

Image of fed interest rate forecast

However, updates to the Retail Sales report may heighten the appeal of the greenback as private-sector spending is expected to increase another 0.2% in December, and little to no evidence of a recession may keep the FOMC on track to further normalize monetary policy as the economy sits at full-employment, while inflation holds near the 2% target. In turn, Chairman Powell & Co. may continue to project a longer-run interest rate 2.75% to 3.00%, and the narrowing balance sheet along with guidance for higher borrowing-costs may cushion USD/JPY in 2019 especially as the Bank of Japan (BoJ) remains in no rush to move away from its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

Image of Fed GDPNow forecast

With that said, signs of a robust economy may challenge the recent shift in central bank rhetoric as the Atlanta Fed GDPNow model forecasts a 2.8% rate of growth for the fourth-quarter of 2018, and USD/JPY may try to stage a larger correction over the coming days as long as the Relative Strength Index (RSI) holds above 30. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/JPY Daily Chart

Image of usdjpy daily chart

Keep in mind, the broader outlook for USD/JPY remains tilted to the downside as both price and the RSI snap the bullish trends carried over from the previous year, but the failed attempt to test the 2018-low (104.63) may generate range-bound conditions as the momentum indicator snaps back from oversold territory.

As a result, the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) sits on the radar, but the lack of momentum to hold above the 108.30 (61.8% retracement) to 108.40 (100% expansion) region raises the risk for a move back towards 106.70 (38.2% retracement) to 107.20 (61.8% retracement), with the next area of interest coming in around 105.40 (50% retracement).

For more in-depth analysis, check out the 1Q 2019 Forecast for Japanese Yen

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



GBP Fundamental Forecast: Bulls Taking Control of Sterling

Fundamental analysis and financial markets.

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GBP

Sterling (GBP) Talking Points:

  • Important week ahead may keep Sterling in check.
  • A Soft Brexit or no Brexit at all are now being priced into Sterling.

The DailyFX Q1GBP Forecasts are available to download including our short- and medium-term look at Sterling.

Fundamental Forecast for GBP: Neutral

A very, very close call not to change our Sterling forecast to bullish this week after market sentiment took a marked shift towards a Soft Brexit or no Brexit at all, both GBP positive. On Tuesday PM May’s Brexit bill took a hammering in the HoC with the PM losing the vote by a record margin of 230 votes although the PM did win the subsequent no confidence vote, mainly due to the DUP vote. As a result, PM May must present her plan B to Parliament on Monday, a bill that is likely to look like Plan A. This plan B will be debated all next week. While the option of a No Deal Brexit is now highly unlikely, the PM has yet to say this and is unlikely to ahead of any further discussions with the EU.

Sterling (GBP) Price: Brexit Vote Impact on GBPUSD and EURGBP

Brexit Roundtable Webinar: Outlook for Sterling and Other UK Asset Classes

Sterling took this week’s votes to heart and began re-pricing all GBP-crosses pushing them higher. These moves also made Sterling technical set-ups look more positive, providing another uplift. While I think that Sterling will continue to make weekly gains, next week may well throw out negative headlines which will dampen any rally, although losses should be limited and contained within recent trading ranges. From a technical point of view, sell-offs should now be viewed as potential buying opportunities.

It is likely that we have already made the lows in most if not all Sterling crosses, although the last 2+ years has taught us that nothing can be taken for granted where Brexit is involved. Remain patient and disciplined when looking for entry points.

GBPUSD Daily Price Chart (May 2018 – January 18, 2019)

GBPUSD

IG Client Sentiment data show 52.0% of traders are net-long GBPUSD. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that GBPUSD prices may continue to fall. However, the combination of recent daily and weekly positional changes gives us a mixed trading bias.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed



Gold Traders Sidelined Awaiting Next Bullish Breakout

Macroeconomic trends, technical analysis and capital market alerts.

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Gold Spot Price Chart XAU/USD Friday January 11, 2019

Gold Fundamental Forecast: Bullish

  • Risk-on sentiment offset bids for Gold from Fed dovishness last week
  • Lingering global risks could easily flare up at any moment and reignite financial market volatility sending investors flocking back to Gold
  • Further gains in stocks or a rebound in the USD pose as threats to the downside

Price action in Gold this week was relatively quiet as the precious metal finished a meagre 10bps lower. Appetite for risk caught bid as positive US-China trade war progress headlines coupled with a dovish Fed pushed the S&P500 and Dow Jones nearly 2.5 percent higher over the last 5 days of trading.

Recent turmoil in the equity and credit markets has sent Gold on a steady ascent from its August 2018 low causing the safe haven to climb 10 percent since then. Although Gold’s upward momentum has waned since the start of the year, the bullish trend remains intact

GOLD PRICE CHART: 120-MINUTE TIMEFRAME (DECEMBER 03, 2018 TO JANUARY 11, 2019) (CHART 1)

Gold Spot Price Chart XAU/USD December 03, 2018 to January 11, 2019

Investor demand for Gold has increased as of late on the back of heating up inflation, lower interest rate projections and mounting recession fears. The commodity is now flirting with resistance nearing the $1,300 price range, its highest level since June of last year.

Looking ahead, lingering risks ranging global growth, Brexit and the US government shutdown just to name a few could easily cause another flare up in financial market volatility quickly sending investors flocking into Gold.

Additionally, developments that boost the Chinese Renminbi against the US Dollar may support further advances in Gold given the tight correlation between XAU/USD and CNY/USD.

GOLD PRICE CHART: 30-MINUTE TIMEFRAME (JANUARY 02, 2019 TO JANUARY 11, 2019) (CHART 2)

Gold Spot Price Chart XAU/USD January 02, 2019 to January 11, 2019

Spot Gold has pulled back slightly as previously mentioned and is starting to consolidate into a wedge, but the price now rests at its uptrend support line in addition to its 0.5 Fibonacci retracement level. Also, with the Relative Strength Index starting to send an oversold signal showing short term weakness, the indicator could be viewed as a strategic entry point for Gold bulls.

---

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Check out our Education Center for more information on Currency Forecasts and Trading Guides.



Canadian Dollar’s Shifting Sentiment May Boost Short Term Prospects

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USDCAD Chart

Fundamental Forecast for CAD: Bullish

Talking Points:

  • Expectations for future Bank of Canada interest rate hikes drop
  • OPEC agreement to cut oil production to support the Loonie
  • Event risk to the US Dollar may benefit its Canadian Dollar counterpart

The Canadian Dollar depreciated slightly against its US Dollar counterpart from the 1.3250 level to 1.3300 USD/CAD over the last week of trading. This occurred against a volatile backdrop due to the anticipated policy interest rate decision from the Bank of Canada (BOC), releases of key economic data and speculation over OPEC leaders gathering to agree on curbing oil output.

As widely expected, the BOC decided to maintain their overnight policy rate target at 1.75 percent. In its press release immediately following the decision, Canada’s central bank struck a cautious tone over recent economic developments at home and globally. Key concerns cited cratering oil prices, muted business investment and slowing growth across major developed countries. Consequently, markets interpreted the comments as dovish and significantly reduced their expectations for future rate hikes. However, the steep drop in expectations could be an exaggerated knee-jerk reaction.

BOC Meeting Hike Probabilities

The implied probability of future rate hikes declined for most of November paralleling oil’s steep selloff over the period due to a worsening supply glut as fears of a deteriorating global economy mount. BOC noted that the country’s energy industry “will likely be materially weaker than expected.” In turn, this may evolve into a major headwind for the Canadian economy as well as the Canadian Dollar seeing that oil production accounts for $170 billion out of the country’s $1.8 trillion GDP – just shy of 10 percent of total economic output. While the BOC stated that the Canadian economy expanded in line with projections for the third quarter, this could change over the final months of the year as economic data is suggesting positive momentum is fading.

On a more positive note, business investment should pick up with the recently signed US-Mexico-Canada (USMCA) agreement providing more clarity on trade between the countries. Also, employment numbers reported at the end of the week surprised to the upside. The Canadian unemployment rate dropped to 5.6 percent from 5.8 percent and the net change in employment crushed forecasts by adding over 94,000 jobs compared to the expected 10,000. Another development that could support a beaten down Loonie is the recent agreement by OPEC and its partners to cut oil production by 1.2 million barrels per day. Crude oil leapt nearly 6 percent on the news which also sent the Canadian Dollar higher.

The data dependent BOC will closely examine housing stats reported next week as it looks for signs of a sustained rebound across the sector. As for its American counterpart, the US market could come under pressure from highly anticipated data points that pose material downside event risk to the Greenback. With the US Dollar already starting to lose some of its luster due to weaker than expected economic developments and seemingly dovish remarks from the Federal Reserve, the USDCAD could see some downside in the short term due to the recent shift in sentiment.

--Written by Rich Dvorak, Junior Analyst for DailyFX.com

--Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecast:

Japanese Yen Forecast - USD/JPY to Track October Range as Attention Turns to U.S. CPI

Oil Forecast - OPEC And Friends Production Cut Exceeds Expectations, Crude Rallies



Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Central bank policy, economic indicators, and market events.

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AUD

Fundamental Forecast for Australian Dollar: Neutral

Australian Dollar Talking Points

AUD/USD trades near the monthly-high (0.7235) as a growing number of Federal Reserve officials abandon the hawkish forward-guidance for monetary policy, but fresh data prints coming out of China, Australia’s largest trading partner, may drag on the exchange rate as the world’s second largest economy is expected to grow at the slowest pace since 2009.

The AUD/USD rebound following the currency market flash-crash may continue to unfold ahead of the first Federal Open Market Committee (FOMC) meeting for 2019 as Chairman Jerome Powell & Co. show a greater willingness to adopt a wait-and-see approach for the foreseeable future.

Target Rate Probabilities Chart

Little to no bets for an imminent Fed rate-hike is likely keep AUD/USD bid as the central bank is expected to keep the benchmark interest rate at 2.25% to 2.50% on January 30, and Fed officials may continue to change their tune over the coming months amid the uncertain surrounding fiscal policy. In turn, Fed Fund Futures may continue to show the FOMC on hold throughout the first-half of 2019, but fresh data prints coming out of China may produce headwinds for the Australian dollar should the developments cast a weakened outlook for the Asia/Pacific region.

Updates to China’s Gross Domestic Product (GDP) report may undermine the recent recovery in AUD/USD as the growth rate is expected to narrow to 6.4% from 6.5% per annum in the third-quarter of 2018, and signs of a slowing economy may keep the Reserve Bank of Australia (RBA) on the sidelines in 2019 as ‘there was no strong case for a near-term adjustment in monetary policy.’ In turn, a 18.0K expansion in Australia Employment may do little to impact the monetary policy outlook amid the slowdown in global growth, and Governor Philip Lowe & Co. may continue to buy more time at the next meeting on February 5 as ‘the outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined.

With that said, AUD/USD may face a more bearish fate as China is expected to grow at the slowest pace since the Great Financial Crisis (GFC), and the flash-crash rebound may continue to unravel over the coming days as the Relative Strength Index (RSI) appears to be responding to the bearish formation carried over from late-2018. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

AUD/USD Daily Chart

AUDUSD Daily Chart

The flash-crash rebound appears to be losing steam ahead of China’s GDP report amid the string of failed attempts to break/close above the 0.7230 (61.8% expansion).

In turn, lack of momentum to hold above the 0.7170 (23.6% expansion) to 0.7180 (61.8% retracement) region raises the risk for a move back towards 0.7020 (50% expansion) especially as the Relative Strength Index (RSI) pulls back from trendline resistance. Next region of interest comes in around 0.6950 (61.8% expansion) followed by 0.6850 (78.6% expansion).

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



RBNZ May Sink NZD Prices as 2018 US Midterms Offer it Uncertainty

Classic technical analysis, macro and economic themes.

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NZD/USD

New Zealand Dollar Fundamental Forecast: Neutral

  • Reduction in US China trade war concerns resulted in aggressive New Zealand Dollar gains
  • RBNZ may disappoint monetary policy bets on third quarter CPI data, sending NZD falling
  • US midterms, with Fed rate hikes still in sight, offer level of uncertainty for sentiment and NZD

We just released our 4Q forecast for equities, which may impact NZD, in the DailyFX Trading Guides page

The pro-risk New Zealand Dollar was on pace last week to mark its best performance against the US Dollar in almost two months. After a shaky October for global stock markets, November began on an upbeat as the S&P 500 set itself up for the most upside progress over the course of one week since March. The backdrop for this optimism seemed to be a cooldown in US China trade war concerns which was further bolstered Friday.

This coming week holds a level of uncertainty for NZD prices given multiple critical event risks. Starting with domestic concerns, the New Zealand Dollar awaits both a jobs report and an RBNZ rate decision. The former is due to cross the wires first and may even surprise to the upside. Such has been the case for New Zealand economic data as of late, suggesting economists are underpricing the health and vigor of the economy.

However, overnight index swaps are not pricing in one rate hike from the RBNZ in 2019, suggesting that New Zealand’s jobs report may have limited implications for NZD. Such was also the same scenario for third quarter CPI data which crossed the wires better-than-expected, reducing what was dovish monetary policy bets at the time. That led to a dramatic appreciation in the Kiwi Dollar however, and it may repeat itself.

Since then, the central bank has been relatively quiet and has given no clear signs that the stronger third quarter inflation report might tilt their forward guidance into favoring a rate hike. At the moment, policymakers have left the door open to a cut. Should the status quo remain the case, we may see a selloff in the New Zealand Dollar as bets on the CPI data (and possibly jobs too) unwind and vice versa.

For broader risk trends, the question remains whether or not market mood can continue improving as the Fed is on pace to keep raising interest rates. In the bigger picture, that seems fanciful. But for now sentiment, and thus the New Zealand Dollar, await the outcome of the US 2018 midterms. Polls are anticipating for Democrats to gain control of the House of Representatives while Republicans maintain a narrow majority in the Senate.

As such, the markets are probably pricing that in and an outcome in line with expectations may not do much to surprise traders. Thus the unexpected outcome would be Republicans holding both houses or Democrats gaining control of them. The former allows for US President Donald Trump to pursue his trade agenda without much interruption and vice versa. Given these uncertainties, the NZD outlook will have to be neutral.

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

To contact Daniel, use the comments section below or @ddubrovskyFXonTwitter



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