US Dollar Bracing for French Election, Trump Tax Plan, GDP Data

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US Dollar Bracing for French Election, Trump Tax Plan, GDP Data

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar focused on 1Q GDP data amid slowdown fears
  • Risk-positive French election outcome to boost greenback
  • Tax reform bill to put “Trump trade” back in the spotlight

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The US Dollar fell for a second consecutive week as the Fed rate hike outlook continued to deteriorate. Geopolitical jitters are almost certainly a big part of that story, even if the narrative has somewhat shifted from US tensions with Russia and North Korea to EU politics. Homegrown factors have also emerged however amid growing worries about slowing economic growth.

An ominous picture is painted by the closely watched GDPNow model from the Atlanta Fed. It updates quarterly GDP growth projections with each incoming bit of relevant economic data. That forecast now predicts that output will add just 0.5 percent in the three months to March. That is far weaker than the 1-2 percent range expected by the markets.

This disparity will be addressed as the first official estimate of first-quarter GDP growth crosses the wires in the week ahead. Consensus forecasts already point to a slowdown, with the annualized growth rate seen ticking down to 1.1 percent from 2.1 percent in the final quarter of 2016. US news-flow has sharply deteriorated relative to baseline projections recently however, opening the door for a still weaker result.

Such an outcome may undermine the Fed’s case for three rate hikes in 2017 in the minds of investors, pressuring the greenback downward. The GDP report is set for release on Friday however, the currency at the mercy of other catalyst in the interim. On this front, the French presidential election set for this weekend may very well prove formative.

Voters will go to the polls to narrow their options from four to two contenders. The latest polling data has the field clustered near the 20 percent support mark. That makes the possibility that they will be stuck with choosing between two eurosceptics – Marine Le Pen on the right and Jean-Luc Melechon on the left – uncomfortably high.

The markets will be most pleased if Ms Le Pen and Mr Melechon are eliminated at this stage in the process, although this seems unlikely. The next-best option – and one that ought to be supportive for risk appetite – is that Ms Le Pen advances to face a strong opponent in the second round. From here, investors would probably prefer centrist Emmanuel Macron to soft-right Francois Fillon.

An outcome that boosts sentiment will make for a backdrop that is more conducive to Fed tightening, all else being equal. The central bank has understandably shied away from stimulus withdrawal at times when investors’ mood has soured. That means that a second round with at least one palatable option – especially if that is Mr Macron – is likely to send the greenback higher ahead of the GDP report.

Headlines out of Washington DC are another important consideration after US President Donald Trump said he will unveil a tax reform proposal mid-week. That is a key centerpiece of the “Trump trade” narrative predicting faster Fed rate hikes as expansionary fiscal policy boosts inflation. That means the markets’ bets on the merit and pass-ability of the White House proposal will be formative for the US currency.

Get Ready for Gap Open in EUR-Crosses Thanks to French Election

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Get Ready for Gap Open in EUR-Crosses Thanks to French Election

Fundamental Forecast for EUR/USD: Neutral

- With French election results coming out before markets open up on Sunday, expect a sizeable gap in the EUR-crosses (results due out at 14:00 EDT; FX markets open at 17:00 EDT).

- The ECB policy meeting on Thursday, without new staff economic projections (SEPs), is pretty much an afterthought.

- See how the French elections fit in with our Q2’17 EUR/USD forecast.

With the first round of the French presidential elections due out Sunday, April 23, traders have remained noncommittal about pushing various FX pairs in any concerted direction. EUR-crosses have done little but remained rangebound for the past several days, and overall, pairs like EUR/GBP and EUR/USD have made few significant moves during the entirety of 2017.

Ahead of the vote, the overall frontrunner, Emmanuel Macron – who, according to French polling institute Ifop has the best chance to beat right-wing populist Marine Le Pen in a second round runoff – has seen his odds of winning increase after a brief dip the past two weeks. According to Oddschecker, the aggregate probability of a Macron victory has risen back to 58% from 53% last Friday.

With first round polling figures showing that the top four candidates are within four percentage points of one another (Le Pen, Macron, Fillon, and Melenchon), it is very possible that Macron doesn’t make it to the second round – which would be a veritable reason for concern for the Euro.

Certainly, market participants have priced in a significant move around Sunday's results, with one-month implied volatility for EUR/USD having increased from 7.25% to 12.63% over the past six weeks, and it now sits at its highest level since the Brexit vote in June 2016. Likewise, EUR/USD one-week implied volatility is at 19%, eclipsing the highs ahead of the US presidential election in November and back at its highest level since the Brexit vote.

Traders should brace themselves for a gap open at the market on Sunday. The results should begin to trickle out around 20:00 CEST in Paris, or roughly 14:00 EDT in New York. By the time markets open in New York three hours later, any late results should be declared already and markets will know who is advancing in to the second round of voting on May 7.

The best case scenario for the Euro? A Macron-Fillon runoff, in which case EUR/USD could easily trade through 1.0900. The worst case scenario for the Euro? A Le Pen-Melenchon runoff, which could easily see EUR/USD make a run down towards 1.0500. Overall, if Emmanuel Macron makes it into the second round of voting, as the candidate with the best odds to beat Marine Le Pen, then the Euro could see a relief rally.

Although the European Central Bank is meeting on Thursday this week, the policy meeting is as close to an afterthought as possible. There won’t be any new economic projections (SEPs) at the coming meeting, meaning the odds of an alteration of policy are exceptionally low to begin with. Factoring in the French elections, and it all but guarantees ECB President Mario Draghi and the Governing Council will use the policy meeting as a stopgap until their next round of SEPs come out in June.

See how the French elections will impact the Euro over the rest of Q2’17 - check out the DailyFX Trading Guides.

--- Written by Christopher Vecchio, Senior Currency Strategist

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Japanese Yen: No End In Sight For Accommodative Monetary Policy

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Japanese Yen: No End In Sight For Accommodative Monetary Policy

Fundamental Forecast for JPY: Bearish

  • The Bank of Japan Governor could not have been clearer: there’s no end in sight for accommodative monetary policy.
  • Japan’s economy is looking healthier but inflation remains benign.
  • What’s on the agenda? Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Speaking in Washington Friday, Bank of Japan Governor Haruhiko Kuroda had a simple message: the current pace of quantitative and qualitative easing, or QQE, is set to continue indefinitely and there’s no chance of Japan’s monetary stimulus program being cut back any time soon.

“The BoJ will continue its ultra-easy monetary policy to achieve its 2% inflation target at the earliest date possible,” he said.

Kuroda’s comments came against a background of solid economic expansion thanks to a pick-up in global demand for Japan’s exports. The flash Markit/Nikkei Japan manufacturing purchasing managers index (PMI) rose to 52.8 in April on a seasonally-adjusted basis, up from a final 52.4 in March – above the 50 level that separates expansion from contraction for the eighth consecutive month. The flash index for new export orders rose to 53.9 from a final 51.9 the previous month. The output component of the PMI was a preliminary 53.6, up from 53.0.

“April's PMI data signaled continued healthy growth of Japan’s manufacturing sector, and the latest results were again consistent with production rising at a quarterly rate of around 2%,” said Paul Smith, senior economist at IHS Markit, which compiles the survey.

However, that economic growth has yet to lift inflation. Figures to be released this coming week are expected to show that core consumer prices increased by just 0.3% year/year in March, up just a tad from the previous 0.2%. To put that in context, a core inflation rate of 0.3% would be the highest for nearly two years. Moreover, core inflation data for Tokyo in April – released a month earlier than the nationwide figures – are expected to show a 0.2% decline.

It’s therefore all-but certain that the Bank of Japan’s monetary policy meeting on April 26/27 will end with all its monetary settings unchanged; potentially a negative factor for the Japanese Yen. After falling steadily this year, USD/JPY has shown signs of stabilizing and even rising modestly over the past few days and that weaker trend for the Yen – partly in response to Kuroda’s comments – could well continue.

Tiny long positions with close stops could therefore be profitable, with a break above near-term resistance at 109.40/50, and then the 200-day moving average at 110, needed to confirm a new upward trend in USD/JPY. On the downside, a stop at 108 would limit losses if the downtrend resumes.

Chart: USD/JPY Daily Timeframe (January – April 2017)

Japanese Yen: No End In Sight For Accommodative Monetary Policy

Chart by IG

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at

Follow Martin on Twitter @MartinSEssex

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Are Early Elections Really a ’Game-Changer’ for the British Pound?

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Are Early Elections Really a 'Game-Changer' for the British Pound?

Fundamental Forecast for GBP: Neutral

The big news out of the U.K. this week came on Tuesday morning from Prime Minister Theresa May, in which she surprised the world by announcing that general elections will be held early, on June the 8th. The move was widely-applauded as astute political strategy from PM May, as she could use this opportunity to cauterize additional support for her Conservative party ahead of Brexit negotiations. Most opinion polls indicate that these snap elections could allow Tories a greater share of Parliament; and that could embolden the nation’s negotiating position when starting Brexit negotiations with the European Union.

The near-immediate impact of Tuesday’s announcement was a gust of strength in the British Pound, pretty much across-the-board. In Cable, the pair finally broke-above resistance that had set in after the ‘flash crash’ in October at the 1.2775 level; EUR/GBP ran down to the key support zone around .8300 that’s held in the pair since the spike from the Brexit referendum, and even GBP/JPY reversed a string of losses (breaking above a trend-line) that had plagued that market since the December rate hike out from the Federal Reserve. In very short order, many were claiming that PM May’s announcement was a ‘game changer’ for the British Pound and, in-turn, the U.K.

More likely, however, would be that these rapid price gains were elicited from short-covering as yet another dash of uncertainty entered the picture. Investors generally eschew uncertainty by limiting risk: Given the brisk declines in GBP in the post-Brexit environment, this would allude to a fairly-sizable net short position in the market. To close short positions, investors need to buy to cover; and this can create a strong move-higher as new ‘news’ gets priced-in to a heavily-shorted market. As prices run-higher, currently-held short positions are ‘squeezed’ further as those higher prices cutting into equity, creating even more impetus to buy (to cover), thereby creating even-more strength.

The bigger question here is one of continuation potential: Might this week’s burst-higher in GBP lead to something bigger or longer-term? Or, to put it otherwise, is this week’s announcement a legitimate ‘game-changer’ type of event for the British Pound? And the answer to that question should be derived from whether or not one thinks that early elections will create any additional hawkishness at the Bank of England, as the BoE has been the predominant driver of GBP even-before the referendum. And considering the fact that a greater Tory majority would simply give the U.K. a stronger hand at pushing for a ‘Hard Brexit’ scenario, it might be difficult to imagine how early elections and a greater potential for ‘Hard Brexit’ could create additional hawkishness at the BoE.

As we’ve been discussing for the past six months, there is a recipe for higher prices brewing in the British Pound: But that would likely come from stronger inflation resultant from the ‘sharp repricing’ in the value of GBP post-Brexit. As importers adjust prices-higher to protect margins by offsetting those out-sized losses in GBP-cross rates, inflationary pressure increases until, eventually, the BoE is forced away from their dovish policy outlay. Once this happens, the British Pound could be free-to-fly as the simple act of the Bank getting ‘less accommodative’ in response to stronger inflation could lead to expectations for the eventual tightening of monetary policy with, perhaps even a rate hike in the not-too-distant future; just as Ms. Kristin Forbes had opined at the BoE’s last rate decision.

But is more political uncertainty really going to directly compel the BoE to get less dovish? This is the same bank that kicked-in a bazooka of stimulus simply because they feared that Brexit might create a slowdown that, frankly, hasn’t yet shown up. We’ve heard as much from the BoE’s own Chief Economist, Mr. Andy Haldane; and even as the bank comes to the realization that they’re slowdown scenarios around the risks of Brexit have been terribly incorrect, there’s been an apparent reticence to remove the massive accommodation that’s already been set forth.

The big item on the economic calendar for the U.K. next week is GDP set to be released on Friday morning. The expectation is for 1.9% annualized growth, and this could produce a direct relationship with price action where beats bring on higher prices while a miss elicits selling. More opportunistic for GBP-volatility will be the next Bank of England Super Thursday event on May 12th. This is when the Bank will publish updated inflation forecasts and this is when markets can get a better pulse on just how concerned the bank might be on the topic of rising inflationary forces. There is scant expectation for any movement in rates at that meeting; but given that the last BoE rate decision produced the first vote for a rate hike post-Brexit, the point of interest will be in the details to see as to whether or not any other members of the MPC are growing more comfortable with the idea of tighter policy options in the near-term.

Until this recent bullish move is confirmed by follow-thru price action, or by a deeper shift within the Bank of England away from the current dovish policy outlay, the forecast for GBP will be held at neutral.


Gold Rally Flirts with Major Breakout on Trump / Dollar

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Gold Rally Flirts with Major Breakout on Trump / Dollar

Fundamental Forecast for Gold: Neutral

Gold prices are poised to close higher for the fifth consecutive week with the precious metal up more than 2.6% to trade at 1286 ahead of the New York close on Thursday. The advance comes amid softness in broader risk assets with global equity markets suffering minor losses ahead of the extended holiday weekend.

Comments made by President Donald Trump regarding overvaluation in the greenback further fueled the advance, taking prices through key regions of resistance on Wednesday. Despite the president’s comments, the markets seemed primed for the upcoming Fed normalization (3 additional hikes this year) and from a fundamental standpoint, the long-USD argument may be nearing exhaustion in the interim. The DXY is down more roughly 1.6% on the year and more than 3% off the yearly high. That said, while the risk does remain for further dollar losses near-term, the knee-jerk trump rally in gold is unlikely to sustain prices at these levels and leaves the immediate advance vulnerable heading into next week.

However it’s important to note that rising geo-political tensions may put a floor under prices amid the clear and present danger of mounting conflicts in Korea, Syria & Russia. Aside from these risks, highlighting the economic docket next week will be the release of the Fed’s Beige Book with an updated assessment of the central bank’s twelve districts likely to fuel speculation of the timing for the pace of future rate hikes.

Gold Rally Flirts with Major Breakout on Trump / Dollar
  • A summary of the IG Client Sentiment shows traders are net long Gold- the ratio stands at +1.75 (63.7% of traders are long)
  • Long positions are 3.9% lower than yesterday and 1.9% below levels seen last week
  • Short positions are also 2.7% lower than yesterday but 27.9% above levels seen last week
  • Despite the fact that retail remains net-long bullion, the recent washout in long-positioning and building broader short-exposure suggests a long-bias is appropriate. However, as described below the weekly close will be crucial in assessing the validity of breach above multi-year trendline resistance extending off the record highs.

Gold Weekly

Gold Rally Flirts with Major Breakout on Trump / Dollar

If gold were to close higher on the week (which we’re well on pace to do), it would be the fifth consecutive weekly advance. Note that the last three times we’ve seen five plus weeks (these instances saw six) were at key market reversals in price- most notably the 2014 & 2016 yearly highs. The implications are for a high in gold over the next few weeks- but at what level?

From a technical standpoint, the close of the week will be telling with a hold below basic trendline resistance extending off the 2016 highs leaving the immediate advance vulnerable. Look for initial weekly support at the 52-week moving average, currently ~1255-60.

Gold Daily

Gold Rally Flirts with Major Breakout on Trump / DollarGold Rally Flirts with Major Breakout on Trump / Dollar

A closer look at the daily chart further shows how precarious this break is. Bottom line- a weekly close above this confluence region would be needed to validate the breakout in gold prices with such a scenario targeting the May high at 1303 backed by the 61.8% extension of the 2015 advance at 1325.

A close back below 1278 would highlight the risk of this being a failed breakout. Look for interim support back at the 200-day moving average ~1256 backed by our broader bullish invalidation level at the October low at 1241.

---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.

Canadian Dollar Likely to Weaken Further as March Low Nears

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Canadian Dollar Likely to Weaken Further as March Low Nears

Fundamental Forecast for CAD: Bearish

The Canadian dollar looks likely to test its recent low against the USD, opening the way for further falls. Price action this week had been driven by a slightly weaker oil complex, pushing the Loonie lower, along with ongoing trade wrangles with the US.

In a recent trip to Wisconsin, US President Donald Trump promised to defend the US dairy industry against what he called Canada’s protectionist trade policies. President Trump added that it is another example of a one-sided deal against the US and that “it’s not going to be happening for long.”

The news is not all negative for the Canadian Dollar with the latest Bank of Canada policy meeting (April 12) producing a slightly hawkish tone. Bank of Canada senior deputy governor Carolyn Wilkins said in her opening statement that “many of the economic data that we have seen since our last MPR have been stronger than expected,” adding that “is certainly a welcome change.” Canada’s economy is expected to grow by 2.5% this year and just below 2% in 2018 and 2019.

On the charts, the March 9, USDCAD high looms large, with a break higher leaving room for the pair to move gains made in early 2016.

Chart: USDCAD Weekly Timeframe (August 2015 – April 2017)

Canadian Dollar Likely to Weaken Further as March Low Nears

Chart by IG

--- Written by Nick Cawley, Analyst

To contact Nick, email him at

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Australian Dollar Looks Short Of Clear Positives

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Australian Dollar Looks Short Of Clear Positives

Fundamental Forecast for the Australian Dollar: Bearish

  • The fundamentals aren’t looking great for the Aussie
  • Whether via nervy risk appetite or weak commodity prices, bulls have their work cut out
  • Consumer price data may offer some hope

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Australian Dollar bulls didn’t have a great week last week. Can they hope for a better one ahead?

Unlikely, on current evidence.

International tensions over North Korea and Syria still simmer, damming the global risk appetite which rather benefits the Aussie when in full flood. Then there’s Sunday’s first round Presidential vote in France. These things overwhelmingly tend to go to a second runoff. That means a tangible result may not come until May 7. But a strong showing this week from the anti-EU Marine Le Pen would see the markets heading for perceived haven assets in a big way.

Again, this might bode ill for the Aussie, despite the relatively strong performance of its home economy.

Commodity prices will also play a part and there, too, seems little cause for hope. Iron ore is Australia’s top export commodity. Its price has fallen sharply since February as markets fret about steel oversupply in China, and the long-term durability of raw-material demand there, for all its current vigor. Iron ore prices are down more than 30% since late February, and off 18% for 2017 to date. It’s probably no coincidence that the currency has been meandering lower since February as well.

Then there’s the weekly economic calendar. This doesn’t look like a major prop for the Australian Dollar either. Most of the banner events will influence the “USD” side of AUD/USD, probably to the downside if they keep hopes of more interest rate increased from the US Federal Reserve intact.

We will get an official look at Australian consumer prices for the first quarter of this year on Tuesday. They rose at a sluggish 1.5% in the final three months of 2016, but the rate has been increasing for three quarters. If it continues to do so then the current market forecast of ‘no change’ to Australia’s record-low. 1.5% base rate this year may be threatened. That could support the Aussie. However, it will probably take a lot more than one data point to put that old thesis in serious jeopardy.

Reserve Bank of Australia Governor Phillip Lowe will also give a speech on Tuesday. We can have no idea of what he may say, of course, but a guess that he might mention a stronger Australian Dollar as an undesirable policy headwind would be an educated one. RBA officials have after all said this before.

Given all of the above, a bearish Australian Dollar call it has to be for the week ahead, but keep an eye on commodity prices, CPI and that Tuesday speech as possible threats to that prognosis.

There may be justifiably hope for better times ahead though. Trade data out of Japan and growth numbers from China both speak to a global-trade economy starting to really move again. And if any currency likes an upsurge in global trade, it’s the Aussie.

Meandering lower: AUD/USD one-day candle.

Australian Dollar Looks Short Of Clear Positives

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

NZD/USD Remains Weak Helped by Central Bank Rhetoric

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NZD/USD Remains Weak Helped by Central Bank Rhetoric

Outlook for NZDUSD - Bearish

  • The Central Bank left rates unchanged but hawkish talk pushed the NZ dollar lower.
  • Moody’s affirms New Zealand’s Aaa issuer rating.
  • See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

The New Zealand dollar looks set to resume its downward path, and the Reserve Bank of New Zealand will not stand in its way. The NZD/USD is relatively unchanged on the week but a hawkish press statement from the central bank on March 23, after it left rates unchanged, points to the pair moving south and testing the recent lows.

After Reserve Bank governor Graeme Wheeler left interest rates unchanged at 1.75% on Thursday, he said,

The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.”

Wheeler added that monetary policy will remain accommodative for a considerable period.and while numerous uncertainties remain, policy may need to adjust according.

A recent report from rating’s agency Moody’s Investor Services gave the Government of New Zealand the thumbs-up and re-affirmed the country’s Aaa rating. Moody’s said that it expects New Zealand to be among the fastest growing Aaa-rated economies in the coming years. They agency added that while the economy is small and open, in the event of shocks the economy “responds swiftly and positively to a weaker exchange rate and lower interest rates, as seen in recent years. Exchange-rate and interest-rate sensitive sectors such as tourism and construction generate economic activity and jobs to support income.

After the recent post-FOMC relief rally, the Kiwi dollar continues to weaken. Support may kick-in at March’s low print of 0.68903 before December 2016’s low of 0.68621 comes into focus.

Chart: NZDUSD Daily-Timeframe (November 23, 2016 – March 24, 2017)

NZD/USD Remains Weak Helped by Central Bank Rhetoric

Chart by IG

--- Written by Nick Cawley, Analyst

To contact Nick, email him at

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