US Dollar May Rebound as the Fed Reasserts Rate Hike Intentions

Fundamental analysis, economic and market themes

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US Dollar May Rebound as the Fed Reasserts Rate Hike Intentions

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar snaps four-week win streak on political instability woes
  • Hawkish FOMC minutes, Fed-speak may counter selling pressure
  • Upbeat Q1 GDP revision, PMI data may aid greenback recovery

Retail traders are betting on US Dollar gains vs. most FX majors. Should you follow? Find out here.

The US Dollar snapped a four-week winning streak as political instability fears weighed against bond yields and flattened the 2017 rate hike outlook priced in Fed Funds futures. This followed reports that ousted FBI Director James Comey wrote a memo detailing a request from President Trump to drop a probe into former national security advisor Michel Flynn’s ties to Russia.

That bombshell came after earlier reports that Mr Trump shared classified intelligence with senior Russian officials visiting the White House. Investors worried that deepeningpolitical turmoil may derail plans for expansionary fiscal policy that had been expected to boost corporate earnings and push the Fed into a steeper rate hike cycle, a thesis known as the “Trump trade”.

Markets will probably remain vulnerable kneejerk volatility spikes as troubling headlines continue to pour out of Washington DC. Former FBI Director Robert Mueller has been appointed as special counsel to continue investigating ties between the Trump camp and Russia while Mr Comey has agreed to testify in Congress. That all but assures a steady stream of news-flow to absorb into asset prices in the day ahead.

With that said, political turmoil is a potent driver of US Dollar price action only to the extent that it portends broader market instability that derails the Fed rate hike cycle. To that end, a busy docket of scheduled commentary from central bank officials as well as the release of minutes form this month’s FOMC meeting may provide a critical counterweight to negativity emanating from the White House.

Central bank officials were planning to ramp up tightening before last year’s presidential election and confidently signaled an intent to press on in June absent clarity on the administration’s fiscal program. A steady stream of soundbites and an upbeat Minutes document affirming as much may undercut politically motivated selling pressure, offering a lifeline to the embattled greenback.

That message would sound all the more credible if it were accompanied by improving economic data outcomes. A second look at first-quarter GDP figures is front and center on this score, with an upgrade to the annualized growth rate expected. The preliminary set of May’s manufacturing- and service-sector PMI surveys is also slated to show improvement in the pace of activity growth.

Euro Positioned to Continue Rally versus Greenback, Commodity Currencies

News events, market reactions, and macro trends.

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Euro Positioned to Continue Rally versus Greenback, Commodity Currencies

Fundamental Forecast for EUR/USD: Bullish

- Continued rise in US political risk has increased Euro’s appeal versus US Dollar, particularly as timeline for US fiscal stimulus appears to have been pushed back significantly.

- The retail crowd still isn’t buying into the EUR/USD rally – which means it may have more room to run yet.

- See how our Q2’17 EUR/USD forecast is holding up so far.

The Euro has another strong week, gaining across the board save versus the Swiss Franc. EUR/USD was the best performing EUR-cross, closing up by +2.45% and settling above 1.1200 for the first time since October 5, 2016. Other EUR-crosses have rallied to fresh multi-month highs as well: EUR/AUD is at its highest levels since September 2016; EUR/JPY is at its highest levels since June 2016; and EUR/NZD is at its highest levels since May 2016.

Now that the bulk of political risk for the Euro-Zone is in the rearview mirror, and economic data continues to improve, it appears that the Euro is benefiting from both deteriorating fundamentals in the United States as well as a slowly increasing likelihood that the European Central Bank will pull further back from its extraordinary easing measures. Market-implied odds of a rate hike by the end of the year are up to 34%, according to overnight index swaps.

But these odds warrant a bit of dissection, given the current context of policy. A hike isn’t likely as long as the ECB continues to buy bonds under its asset purchase program, so markets are instead starting to discount a change in the language the ECB uses to describe the path of its interest rates, as well as another step down in its bond buying program.

Data out of the Euro-Zone has been strong, with the Euro-Zone Citi Economic Surprise Index at +59.5 on May 19 versus +49.3 a month ago. Likewise, medium-term inflation expectations have barely moved over the past month, with the 5-year, 5-year inflation swap forwards closing last week at 1.597% from 1.610% on April 21.

The economic docket is rather light, as the preliminary May Euro-Zone PMIs are the only items of true interest this week (the final Q1’17 German GDP reading shouldn’t generate much price action). The PMIs due are expected to imply continued modest growth in the region, with the composite reading expected to nudge slightly lower from 56.8 in April to 56.7 in May. Yet given that the prime driver of Euro strength appears to be due to mostly exogenous forces, it’s unlikely that data due over the coming days materially alters the market’s opinion of the Euro itself.

See how our Q2’17 Euro forecast is holding up so far - check out the DailyFX Trading Guides.

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher, email him at

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

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Yen Crosses Look for Permanent Traction in Equity, Risk Slide

Fundamental analysis and market themes.

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Yen Crosses Look for Permanent Traction in Equity, Risk Slide

Fundamental Forecast for Japanese Yen: Bullish

• Top scheduled event risk on the Japanese docket includes CPI figures, 1Q GDP details, manufacturing PMI and Kuroda speak

• Net short Yen exposure gained traction this past week, falling behind the USD/JPY’s most recent downdraft

• Complacency is starting to lose its foothold in the market and constant fundamental churn threatens to permanently change bearings

USD/JPY witnessed its first decline in six weeks this past week. That said, an equally-weighted index of the major Yen crosses shows significant volatility but a measured advanced through Friday’s close. Nevertheless, it seems all that is needed to stir the market from its deeply-held sense of complacency in a bout of indigestion on lofty market valuations. The extremely low return on carry trades is struggling to keep pace with a general unease with the possibility of capital losses in risk trends. While there looms a range of both domestic and global event risk in the coming week, the focus is likely to default to general evaluations of sentiment. For event risk, data and standard events will likely defer to the influence of a few key gatherings among global policy makers.

In the range of known events moving forward, it is mainly the foreign meetings for the US President Donald Trump that carry the most weight. The divisive US leader will start his week with a visit to the Middle East. That can help foster a reversal in global relationships and perhaps thaw global trade to the benefit of the Japanese business sector which has found itself on the skirts of discussions about countries that can be labeled as using unfair trade practices (mainly currency devaluation through policy). The true potential for global risk trends however rests with the President’s presence at the NATO and G7 summits. For the former defense group, regular threats by the US leader to renegotiate its dues has put pressure on globalization which has materially helped countries like Japan heavily dependent on their shipment of goods abroad.

The more definitive threat to quiet, directionless Yen crosses is the G7 gathering late into the week. If grievances are to be aired and critical trade relations – like those between Japan and the US or the US with all others – come under pressure, the Japanese currency will find itself judged for its funding currency status. Should concern about the health of the global markets and economy develop via trade relationship concerns or any other catalyst; USD/JPY, EUR/JPY and AUD/JPY among others will likely drop quickly. This move is often confused as a preference for the Yen as a safe haven, however that is not the most palatable interpretation for most. Instead the practical need is the reduction of highly leveraged (notional and thematic) trends. Carry trade unwind is far more frequently a motivation for the market.

For event risk over the coming week, there is plenty to occupy traders’ minds – though it will general struggle for lasting influence. Among domestic issues, the most effective driver should it face a surprise would be the Japanese CPI figures. There are two ways to change appeal for a specific rate – either risk appetite succumbs to aversion or the yields themselves change to lift or lower the expected income. For Japanese data, the consumer inflation statistics are the obvious absentee for an eventual rate hike. Japan’s proxy for monthly GDP updates in the PMI figures will touch on the growth aspect of monetary policy motivation – not exactly the most pressing of absences given the performance of GDP figures. It will be important to follow risk trends and technical patterns to keep accurate tabs on the Yen pairs next moves.

British Pound: Due For a Deeper Correction Lower

Financial markets, economics, fundamental and technical analysis.

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British Pound: Due For a Deeper Correction Lower

Fundamental Forecast for GBP: Bearish

  • The British Pound hasn’t got a lot going for it at the moment, with the latest economic data weak and monetary policy on hold for the foreseeable future.
  • Moreover, plenty could go wrong as the UK general election campaign hots up.
  • Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

Data on the UK economy released last Thursday were uniformly weak, with industrial production, manufacturing output, trade and construction figures all coming in lower than economists had predicted. In addition, the Bank of England said the same day that it may need to raise interest rates before late 2019 – positive for the British Pound in theory but actually negative because many market participants were expecting an increase before then.

The near-term outlook for GBP is therefore none too rosy, with politics also a concern. Ahead of the general election on June 8, Prime Minister Theresa May’s market-friendly ruling Conservatives have a large lead in the polls, with the latest from YouGov for The Times newspaper showing them ahead of the opposition Labour Party by a thumping 16 percentage points. However, that could easily be reduced as the election approaches, prompting market jitters.

Brexit also remains in the background, with the potential to blow up at any time if one side or the other makes an ill-timed comment.

As for the future, the week ahead is packed with important data releases, including the consumer and producer price indexes on Tuesday, unemployment and earnings on Wednesday, retail sales on Thursday and the Confederation of British Industry’s industrial trends survey on Friday.

This could all potentially weaken the Pound, which has had a good run of late, despite some weakness over the last few days, and could be due for a deeper correction.

Chart: GBP/USD Daily Timeframe (January 1, 2017 to May 12, 2017)

British Pound: Due For a Deeper Correction Lower

Chart by IG

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at

Follow Martin on Twitter @MartinSEssex

What will drive the British Pound and all other currency majors in 2017’s second half? Check out the freeDailyFX Quarterly Forecasts

If you’re looking for ideas more short-term in nature, check out the IG Client Sentiment Data

Gold Prices Resume Bull Trend After Halting a 4 Week Slide

Swing trading, chart patterns, breakouts, and Elliott wave

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Gold Prices Resume Bull Trend After Halting a 4 Week Slide

Fundamental Forecast for Gold: Bullish

For the first time in five weeks, gold prices finished the week higher. One development from this past week that pulled the yellow metal higher was the Fed interest rate expectations slowing down into the remainder of 2017.

Two weeks ago, Fed Fund futures were predicting a 57% chance of two rates hikes prior to the end of 2017. Last week, that prediction fell to 51% and this week it fell further to 45%. This less aggressive rate hike path is causing the US Dollar to weaken and for gold prices to strengthen.

This week, we get some further insight from the Fed as their May 3 meeting minutes are released. Any surprises in the minutes may cause a reaction for gold if it alters the rate hike path. Later in the week on Friday, we have US GDP and US Durable Goods releases, which could create some short term volatility as well.

From a technical perspective, gold prices continue to be stuck in a consolidation period. We anticipate gold prices will likely hold above $1214 for an eventual retest of $1300. One pattern we are following implies continued sideways action between $1214 and $1280 for the next couple of weeks before prices break higher. Perhaps the resistance trend line noted below holds prices down. Even if gold prices are suppressed, we anticipate eventual support to emerge above $1214.

Gold Prices Resume Bull Trend After Halting a 4 Week Slide

Other technical signals continue to be a positive signal for bulls. For example, gold prices and the daily Ichimoku lagging line (purple line) continue to print above the Ichimoku cloud. We have maintained a longer term bullish bias since December 29 when we argued that Gold prices could gain in the face of raising rates.

What is the quarterly outlook for Gold? Find out with our quarterly trading guide.

---Written by Jeremy Wagner, CEWA-M

Join me for US Opening Bell webinars on Mondays.

Read Jeremy’s articles using the Elliott Wave model in his analysis.

Follow me on Twitter at @JWagnerFXTrader .

Canadian Dollar: Which Way Will the BoC Jump?

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Canadian Dollar: Which Way Will the BoC Jump?

Fundamental Forecast for CAD: Neutral

  • The Bank of Canada meets on May 24 and will likely keep its key policy rate at 0.50% once again.
  • The markets expect an increase towards the end of this year but a cut is looking increasingly likely.
  • Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

The Bank of Canada is on the horns of a dilemma. It’s still widely expected that the central bank’s next move will be an increase in its 0.50% key policy rate towards the end of this year but most of the recent evidence has pointed the other way – to a cut to 0.25%.

Admittedly, data last Wednesday showed that manufacturing sales values rose by a strong 1.0% m/m in March but then came news on Friday of a decline in core inflation, providing further evidence of disinflationary pressures in the economy. Spare capacity and very low wage pressures will likely keep core inflation below the 2% target mid-point in the coming months.

Moreover, while retail sales rose by considerably more than expected m/m in March, the “less autos” figure fell back by even more than in the month before. The combination of low inflation and falling retail sales outside the auto industry could well outweigh the signs elsewhere of strength and persuade the BoC to cut rates later in the year.

That, of course, would be negative for the Canadian dollar, which strengthened over the past week against its US cousin, largely on a higher oil price.

Chart: USD/CAD One-Hour Timeframe (May 15-19)

Canadian Dollar: Which Way Will the BoC Jump?

Chart by IG

Naturally, the oil price will remain the other key driver of the currency, given the importance of oil to the Canadian economy. The price of West Texas Intermediate crude has risen from a low on May 4 around $44 per barrel to well above $50 now and any extension of that upward trend will likely lift the currency.

Moreover, IG Client Sentiment data show traders have remained netshort USDCAD since April 18, when it traded near 1.3324, and the price has moved 2.1% higher since then. We typically take a contrarian view to crowd sentiment, and the fact traders are netshort suggests USDCAD prices may continue to rise. However, recent changes in sentiment warn that the current USDCAD price trend may soon reverse lower despite the fact traders remain net short.

The evidence is therefore mixed: the rate outlook suggesting a weaker Canadian Dollar but the strength of the oil price and the sentiment data pointing the other way. The near-term outlook is therefore neutral.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at

Follow Martin on Twitter @MartinSEssex

What will drive the Canadian Dollar and all other currency majors in 2017’s second half? Check out the freeDailyFX Quarterly Forecasts

If you’re looking for ideas more short-term in nature, check out the IG Client Sentiment Data

Australian Dollar Stuck With Its US Cousin’s Moodswings

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Australian Dollar Stuck With Its US Cousin's Moodswings

Fundamental Australian Dollar Forecast: Neutral

  • The “USD” side of AUD did a lot of the driving last week
  • Which is not to say there wasn’t some fascinating economic news out of Australia
  • But there’s very little on the sked for next week, which may leave USD in charge again

Learn more about trading the Australian Dollar and all the Asia/Pacific Majors with theDailyFX guide

A bout of politically inspired US Dollar weakness came in handy for Aussie bulls last week, and put some green on AUD/USD trading screens which might otherwise have been a bit redder.

That said the pair didn’t really get a lot done for either bulls or bears, with this four-hourly chart of the week’s action showing the overall state of inertia quite nicely.

Australian Dollar Stuck With Its US Cousin's Moodswings

The Australian economic news flow was either as-expected or just plain weird. The Reserve Bank of Australia’s policy minutes fulfilled the first criteria. They added very little to central-bank watchers’ store of knowledge. Wage cost data behaved themselves, coming in exactly as forecasters expected.

But the weirdness? Well, that was evident in Australia’s official employment numbers for April. Yes, they blew expectations out of the water with a rise of 34,700. Markets had only been looking for 5,000. But those new jobs were all part time. Every one of them. 11,600 full-time roles were lost on the month.

That was a nasty sting in the tale of what looked at first glance to be a very strong reading. There was another knock for the Aussie in April’s Chinese industrial production data, which missed forecasts.

On the upside for the Aussie, iron ore prices appear to have found a floor, after months of declines, on modest hopes of increased demand from China into the year’s second half. However, it’s too early to call this a definite, enduring support for the currency even though Australia is the world’s largest exporter of that raw material.

And coming week is very short of first-tier economic numbers, from Australia or anywhere else. That is likely to leave the back end of AUD/USD still very much in the driving seat.

Assuming no intensification of news flow out of Washington DC a bearish call might have been tempting, if only because it would seem likely that AUD/USD simply continues the drift lower which has been this chart’s hallmark since February.

But as that can’t be guaranteed, and further greenback vulnerability can spring up at any point, I think a defensive, neutral call is the only way to go.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

Kiwi Dollar: The Selling Pressure is Off For Now

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Fundamental Forecast for NZD: Neutral with a Bearish Bias

  • The weak US Dollar has helped NZD/USD climb back from its recent 11-month+ low.
  • The Kiwi’s outlook remains negative but better levels may be available to short the pair.
  • Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

This week’s weakness in the USD has given the NZDUSD pair a reprieve from its medium-term down-trend but the outlook still remains bearish for the Kiwi currency. The currency brushed off Thursday’s better-than-expected consumer confidence data and remained below 0.7000.

And the Kiwi currency is expected to remain weak with no interest rate hikes expected until early 2019. At the last monetary policy meeting, RBNZ Governor Graeme Wheeler said that while growth has increased and become more broad-based, core inflation has remained low. He added that while headline inflation in the March quarter so mainly due to higher tradables inflation, particularly petrol and food prices,

These effects are temporary and may lead to some variability in headline inflation over the year ahead.”

On the weekly chart, the recent 0.69500 level may prove an opportunity to set up a NZDUSD short, although sellers should wait for the April 24 high of 0.70575, with the 0.68180 low of May 8 and the May 30 (2016) low of 0.66758 targets for the bears.

Kiwi Dollar: The Selling Pressure is Off For Now

Chart: NZDUSD Daily Time-Frame (January 16 – May 12, 2017).

Chart by IG

--- Written by Nick Cawley, Analyst.

To contact Nick, email him at

Follow Nick on Twitter @nickcawley1

If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for the second quarter of 2017

If you’re looking for ideas more short-term in nature, check out the IG Client Sentiment Data