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US Dollar Caught Between Upbeat Fed, Skeptical Markets

Fundamental analysis, economic and market themes

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US Dollar Caught Between Upbeat Fed, Skeptical Markets

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar caught between upbeat FOMC, skeptical financial markets
  • Focus on Fed-speak may be supportive, PMI to test officials’ optimism
  • Volatility triggered by US political instability remains a potent risk

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The US Dollar finds itself caught between a brazenly confident Federal Reserve and skeptical financial markets. The central bank has shrugged off a run of weak economic data and fizzling inflation, dismissing these setbacks as temporary and promising another rate hike before the year is out. Officials have also laid out plans to accelerate tightening by starting to scale down the bloated post-crisis balance sheet.

Investors have not resolved to overlook worrying news-flow as readily. Expectations priced into December Fed Funds futures show the markets expect the policy rate to remain within the current 100-125 basis point target range. Put another way, they expect that rate hikes are done for the year. Resolving this disparity one way or another will define the greenback’s near-term trend.

A thin offering of top-tier scheduled event risk leaves markets without an obvious catalyst to tip the scales for most of the coming week. The preliminary set of June PMI surveys is a standout, offering a timely test of the Fed’s confidence in the economic cycle, but it won’t cross the wires until Friday. That will leave it up to a steady stream of comments from Fed officials to set the tone, which may bode well for the US unit.

The influence of US political uncertainty risk remains an ever-present wildcard however. The investigation into possibly improper contact between Russian officials and the Trump campaign is probing higher up the food chain. Indeed, independent counsel Robert Mueller is reportedly investigating the President directly on potential obstruction of justice charges.

This means that whatever may be happening around financial markets, it is now a given that a bombshell revelation of some sort may emerge unannounced with drastic consequences. If market-wide risk appetite evaporates in such a scenario, the markets may well conclude that the Fed will be forced to the sidelines whether it likes it not, sending the Dollar lower.



Euro Treading Water as Bullish Catalysts Have Been Sorely Lacking

News events, market reactions, and macro trends.

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Euro Treading Water as Bullish Catalysts Have Been Sorely Lacking

Fundamental Forecast for EUR/USD: Neutral

- After all was said and done last week, EUR/USD gained a mere +0.03%, and hasn’t made much movement over the past month.

- As energy prices remain under pressure, Euro-Zone inflation expectations have tumbled to 2017 lows.

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

The Euro finished last week in the middle of the pack, lagging behind the resurgent commodity currency bloc in what appears to be driven by profit taking rather than a material improvement in the commodity space. Outside of the commodity currencies, the Euro was rather stagnant, with EUR/USD gaining a mere +0.03% and EUR/JPY – the best performing EUR-cross – gaining +0.53%. The Euro isn’t terribly positioned, rather, it’s missing a spark to continue its rally.

The Euro’s lack of bullish fundamental drivers can be examined in a number of ways. The Citi Economic Surprise Index for the Euro-Zone closed last week at 30.4, its lowest level of the year. This reading means that economic data releases have been producing fewer and fewer upside surprises – momentum is waning. With energy prices falling back over the past few weeks (Brent Oil has fallen from $53.61/brl on May 19 to $47.36/brl on June 16), inflation expectations have taken a step back as well, to 2017 lows, now at 1.530%.

The corresponding decline of inflation expectations may be holding back the Euro in a way directly related to the European Central Bank. No doubt, the ECB and President Mario Draghi have taken careful, measured steps at recent policy meetings in order to signal that their accommodative policy will be lingering around through at least 2018. The market’s collective response may be part of the reason the Q2’17 Euro rally has faded: the odds of a rate hike by the end of 2017 have dipped to 10.7% on June 16 from 34.1% on May 19 (and from 55.1% on March 21).

There are thus two antidotes the Euro could use to end its lull in the near-term: higher oil prices translating into higher inflation expectations; or a period in which economic data turns higher again. The latter would be better than the former for the Euro.

Unfortunately, in the early part of the week, there’s nothing of too great of interest on the economic calendar. Thursday brings the first event rated ‘medium’ or ‘high’ of the week, the preliminary June Euro-Zone Consumer Confidence index. On Friday, data releases increase in volume with the final Q1’17 French GDP reading (which shouldn’t move markets) and a smattering of preliminary June PMI releases for France, Germany, and the broader Euro-Zone (which have the best chance of any data released all week to spark volatility).

While the French national assembly elections over the weekend will continue to point to the deflating political risk premium for the Euro-Zone, the Euro doesn’t seem to have much good news going for it at the moment. That’s not to say that the Euro is in a bad position; rather, it has just been sorely lacking bullish fundamental drivers.

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 cvecchio@dailyfx.com

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

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USD/JPY Outlook Weighed by Limited Bets for December Fed Rate-Hike

Central bank policy, economic indicators, and market events.

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USD/JPY Outlook Weighed by Limited Bets for December Fed Rate-Hike

Fundamental Forecast for Japanese Yen: Neutral

Waning risk sentiment may tame the near-term rebound in USD/JPY as the Yen largely retains its role as a funding-currency, but fresh remarks from Federal Reserve and Bank of Japan (BoJ) officials may encourage a long-term bullish outlook for the exchange rate amid the deviating paths for monetary policy.

With market participation likely to remain light throughout the summer months, the global benchmark equity indices may continue to consolidate over the near-term, and the dollar-yen exchange rate may exhibit a similar behavior especially as the new updates coming out of the Federal Open Market Committee (FOMC) fail to boost interest-rate expectations. Even though Fed officials see the benchmark rate climbing to a fresh threshold of 1.25% to 1.50% by the end of 2017, the 10-Year U.S. Treasury Yield remains depressed and trades near the 2017-low (2.1013), while fed fund futures highlight a less than 50% probability for a December rate-hike.

As a result, the 2017 voting-members (New York Fed President William Dudley, Chicago Fed President Charles Evans, Vice-Chair Stanley Fischer, Dallas Fed President Robert Kaplan and Fed Governor Jerome Powell) scheduled to speak next week may respond by striking a more hawkish outlook for monetary policy, and the central bank may show a greater willingness to start unloading the balance sheet later this year as the U.S. economy approaches full-employment. At the same time, remarks from Governor Haruhiko Kuroda may help to limit the downside risk for USD/JPY as the central bank head emphasize the BoJ ‘will debate an exit strategy only after 2 percent inflation is achieved and price growth stays there stably, and the Japanese Yen may continue to broadly track changes in market sentiment as the majority remains in no rush to move away from the Qualitative/Quantitative Easing (QQE) Program with Yield-Curve Control.

USD/JPY Daily Chart

USD/JPY Outlook Weighed by Limited Bets for December Fed Rate-Hike

The failed attempt to April-low (108.13) may continue to generate a near-term series of higher highs & lows in USD/JPY, and the pair may continue to threaten the downward trend from 2016 as it breaks out of the narrow range from earlier this week. In turn, the dollar-yen exchange rate may continue to work its way towards the monthly (111.71), with a break/close above the Fibonacci overlap around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) opening up the next topside hurdle around 112.40 (61.8% retracement) to 112.80 (38.2% expansion), which largely lines up with the May-high (114.37).

Nevertheless, the recent developments in the Simple Moving Averages (SMA) suggest USD/JPY may face a period of low volatility as the indicators flatten out, and the lack of momentum to clear the monthly opening range lead to choppy price action as market participants mull the timing of the next Fed rate-hike. Check out the Quarterly DailyFX Forecasts for additional trading ideas.

USD/JPY Outlook Weighed by Limited Bets for December Fed Rate-Hike

Retail trader data shows 65.6% of traders are net-long USD/JPY with the ratio of traders long to short at 1.9 to 1. In fact, traders have remained net-long since May 17 when USD/JPY traded near 113.298; price has moved 2.2% lower since then. The number of traders net-long is 2.4% lower than yesterday and unchanged from last week, while the number of traders net-short is 2.2% higher than yesterday and 11.0% lower from last week.For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

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Hawkish BoE a Transitory Development as Brexit Negotiations Set to Begin

Price Action, Swing & Short Term Trade Setups

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Hawkish BoE a Transitory Development as Brexit Negotiations Set to Begin

Fundamental Forecast for GBP: Bearish

It was a relatively strong week for the British Pound, as the currency posed gains against the Euro, the Yen and the U.S. Dollar. Driving the demand was further development on a couple of pain points that pretty much speaks to the same issue; and that’s the stance of the Monetary Policy Committee at the Bank of England as Brexit negotiations are set to begin on Monday.

Inflation numbers for May were released on Tuesday, and U.K. inflation printed at an annualized 2.9%. This is up from the 2.7% print in the prior month, and well-above the BoE’s 2% inflation target. Two days later, the Bank of England took on a hawkish tilt at their rate decision, voting 5-3 to keep rates flat with Michael Saunders and Ian McCafferty joining Kristin Forbes in dissenting, instead voting in favor of hiking rates. These three votes for a rate hike would be the most that we’ve seen out of the BoE since 2011.

This speaks to a theme that’s been gaining prominence around the U.K. economy for some time, and that’s the expectation that the ‘sharp repricing’ in the value of the British Pound around the Brexit referendum would lead to unsavory levels of inflation that, eventually, would force the Bank of England away from their ultra-loose policy measures. Even before the referendum, BoE Governor Mark Carney warned us of as much; saying that a decision from voters to leave the EU would result in a ‘sharp repricing’ in the value of the British Pound, which could lead to higher levels of inflation along with higher levels of unemployment and slower growth. This would put the BoE in the unenviable position of having to choose whether to a) tighten policy to quell GBP weakness while attempting to temper inflation or b) loosen policy even more to prod growth and employment, while risking even larger losses for GBP and even stronger rates of inflation.

Within a week of the Brexit referendum, the BoE had already shown their hand, and just a month later the bank launched a ‘bazooka’ of stimulus as the currency drove-down even further. The prospect of stronger inflation was a delayed concern for the BoE, as the bank continually said they had a rather high tolerance for an ‘inflation overshoot’, meaning if inflation came-in above their 2% target, they wouldn’t be all that unnerved. This extreme dovish stance eventually produced the backdrop that led to the ‘flash crash’ in early October as an absolute dearth of demand for Sterling allowed the currency to drop dramatically.

After meandering in the in the 1.2000-1.2750 range for more than six months, the British Pound broke out in mid-April on Theresa May’s announcement of early general elections. As we warned at the time, a large portion of that move was likely short cover as a heavily short market met was met with another batch of uncertainty around what was already an uncertain situation (Brexit, itself). After last week’s election results made the situation around Brexit even more opaque, with Theresa May’s Tory party actually losing seats and forcing the new PM to form a coalition, GBP broke back-down below the 1.2750 marker, remaining weak until this week’s bullish drivers showed up.

If all factors were held equal, this week’s drivers should’ve produced a pronounced bullish move in GBP as this could be further emblematic of the ‘shift’ within the BoE, as driven by inflation. But they didn’t, instead we merely rallied up to a ‘lower-high’ at which point sellers showed-up, and this is likely due to the fact that next week sees the beginning of Brexit negotiations with the EU. Further – the most hawkish member of the BoE, Ms. Kristin Forbes, is leaving the MPC at the end of the month, so one of those three votes will no longer be voting for the Bank of England. Mark Carney is fairly invested here, so, at the very least, there will probably be some dovish lobbying within the bank as we near future rate decisions.

On Brexit discussions: We’re almost assured of uncertainty and it’s probably a pretty safe assumption that we’ll see some acrimony as these discussions deepen. This theme will likely take the driver’s seat for GBP price action for the near-term as the long-term repercussions of these negotiations could be seen as significant in comparison to month-to-month data prints. Given the high probability of the Bank of England’s hawkish stance being transitory in nature, also combined with the headline risk that we’re probably going to see out of Brexit negotiations, the forecast for GBP will be set to bearish for the week ahead.

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

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Gold Prices Heavy as FOMC Talks Normalization- Support in View

Short term trading and intraday technical levels

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Gold Prices Heavy as FOMC Talks Normalization- Support in View

Fundamental Forecast for Gold: Neutral

Gold prices are down for the second consecutive week with the precious metal off by more than 0.95% to trade at 1254 ahead of the New York close on Friday. The losses come on the back of a flurry of central bank rate decisions and although prices remain under pressure, technical support early next week could offer a reprieve to recent sell-off.

The FOMC interest rate decision on Wednesday saw what was perceived by some to be a ‘dovish hike’ in that the committee raised the benchmark interest rate (as expected), while softening its 2017 inflation forecast. Of the Fed’s dual mandate of fostering maximum employment and price stability, inflation has remained the laggard and a lowering of the inflation outlook casts a shadow on the timing of the next rate hike. Interestingly enough, interest rate expectations haven’t changed all that much with markets still pricing a 50/50 chance the central bank will look to hike another 25bps in December to fulfilling the committee’s median dot-plot expectation of a three hikes this year.

While higher rates will tend to weigh on gold prices, which do not pay a dividend, talks of unwinding the Fed’s massive $4.5 trillion balance sheet may limit losses in the medium-term as markets digest the impact & pace of the Fed’s off-load. And while talks of normalization does suggest that the central bank is confident about the outlook for the US economy, concerns over external political / fiscal risks continue to loom. For gold, the technical picture remains vulnerable with this week’s decline taking price below the monthly opening range.

Gold Prices Heavy as FOMC Talks Normalization- Support in View
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +2.5 (71.5% of traders are long)- bearishreading
  • Long positions are 12.9% higher than yesterday and 8.2% higher from last week
  • Short positions are 1.0% higher than yesterday but a full 2.8% lower from last week
  • Retail sentiment continues to point lower and the marked increase in long-exposure from yesterday and last week highlights further strengthens the bearish outlook- That said, look for a reaction as price approaches key support at 1240/45.

Find out what current Gold positioning is saying about the current trend.Get more information on Sentiment here Free!

Gold Weekly

Gold Prices Heavy as FOMC Talks Normalization- Support in View

Gold prices have were unable to make a weekly close above key resistance at 1278 yet again this month, with the pullback now eyeing weekly support 1242 -backed closely by a basic trendline extending off the late-January low.

Gold Daily

Gold Prices Heavy as FOMC Talks Normalization- Support in View

The break of the monthly opening-range lows also shifts the focus lower heading into the monthly close. That said, a key support barrier looms just lower and may limit the losses near-term heading into next week. Daily resistance is eyed at the confluence of the monthly open and a pair of parallels around 1264/67.

Gold 240min

Gold Prices Heavy as FOMC Talks Normalization- Support in View

Gold Prices Heavy as FOMC Talks Normalization- Support in View

A closer look at price action sees gold continuing to trade within the confines of this descending pitchfork formation with prices holding just below the 50-line into the close of trade on Friday. Last week we noted that a break below monthly open support eyes a more “a more significant support zone at 1241/45- a region defined by the 61.8% retracement, the 100-day moving average and the October swing lows. Bottom line: look to fade strength sub-1284 heading into next week with a break sub 1264 needed to keep the near-term reversal-play operative.” The outlook remains unchanged heading into next week and we’ll be looking for some near-term exhaustion with a final drop into key support OR a breach above 1264/67 targeting the upper parallel.

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

Follow Michaelon Twitter @MBForex contact him at mboutros@dailyfx.com or Click Here to be added to his email distribution list.



The Canadian Dollar Takes Direction From its Central Bank

Fundamental analysis and financial markets.

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The Canadian Dollar Takes Direction From its Central Bank

Talking Points:

  • The Loonie hits a three-month low against the USD.
  • Monetary Policy, not the oil price, drives the recent sharp move.
  • Will the BoC hike rates in 2017?

Fundamental Forecast for CAD: Bullish

The Canadian economy is benefitting from the central banks past policy decisions and pushing ahead, according to commentary from government officials, giving the currency an upward boost, despite lowly oil prices. Earlier this week, Bank of Canada (BoC) governor Stephen Poloz highlighted that interest rates cuts put in place in 2015 “have largely done their work”, a hawkish impulse for the Loonie. In addition, a day earlier, BoC deputy governor Carolyn Wilkins said that the strengthening economy had been largely driven by a robust labour market, another hat-tip to prior monetary policy decisions.

And the Loonie rally happened despite the oil market hitting multi-weak lows, a move that would in the past have sent the Canadian dollar spinning lower. US Crude trades around a six-week low of $44.85/brl while Brent is close to levels least since the start of May at $47.40/brl.

From a technical stance, the Canadian dollar rally against the USD has more to go after USDCAD saw a ‘death-cross’ appear on the charts. The 20-day moving average moved below the 100-day ma, normally a trend-changing signal and highlighting potential ongoing USD weakness against CAD.

Chart: USD/CAD Daily Time-Frame (March2 – June 16, 2017)

The Canadian Dollar Takes Direction From its Central Bank

Chart by IG

The USDCAD low of 1.31648 looks likely to be re-tested in the near-term, leaving the January 31 low of 1.29687 vulnerable.

A look at the IG Client Sentiment Indicator also shows retail traders are still net-long of USDCAD, a signal that the pair may fall further.

The Canadian Dollar Takes Direction From its Central Bank


Australian Dollar May Find Itself Short Of Further Impetus

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Australian Dollar May Find Itself Short Of Further Impetus

Fundamental Australian Dollar Forecast: Neutral

  • AUD/USD bulls had a good week last week
  • Stronger Australian job creation and weaker US inflation took the pair up to two-month highs
  • However, a repeat performance looks like a big ask

Keep your Australian Dollar trade strategy sharp with the DailyFX Trading Guide

The Australian Dollar reaped the benefits of foreign and domestic data surprises which went its way last week.

The tone was set in the US by Consumer Price Index numbers which missed expectations. CPI fell 0.1% in May, for a second drop in three months. The Federal Reserve pressed on with plans to raise interest rates and expects to do so again this year. But those weak inflation prints have certainly sowed doubts about more aggressive monetary tightening in market minds. Note that only one more Fed hike is needed to completely erode the Australian Dollar’s long-held yield advantage over its US big brother. The prospect that said hike may not come, and even if it does that there will be few more, is clearly Aussie supportive.

Then came that domestic data. The Australian labor market had a blockbuster May. 42,000 net new jobs were created, and market forecasts of just 10,000 were duly laughed out of court by Aussie buyers. Even more encouragingly, full-time job creation was back on track too, and then some. Previous data had been worryingly light in that respect.

All of the above was enough to see AUD/USD push up to two month highs, where it broadly remains. So what of this week?

Well, the coming five sessions don’t offer any obvious scheduled data points on which to hang much of a fundamental forecast for either the ‘AUD’ or ‘USD’ side of things. The Aussie has been vulnerable in the recent past to disappointments out of China’s economy, but there doesn’t seem huge opportunity for action on that front either.

A lack of likely market movers could leave the currency struggling for reasons to build on its gains. After all, while lower Australian rates are now all but priced out for the foreseeable future, no rises are expected either, according to rate-futures markets. By the same token there are no obvious traps lurking for a clearly more bullish Aussie Dollar either.

Tuesday might offer modest action. Quarterly house price data will be released then, as will the Reserve Bank of Australia’s last set of policy meeting minutes. However, both may prove a little historic for the AUD/USD market.

There’s little else on the schedule, and that means it just must be a neutral call. So it is.

Australian Dollar May Find Itself Short Of Further Impetus

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX



New Zealand Dollar: Interest Rates on Hold Indefinitely

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New Zealand Dollar: Interest Rates on Hold Indefinitely

Fundamental Forecast for NZD: Neutral

  • The Reserve Bank of New Zealand will keep its official cash rate at 1.75% Thursday and maintain its neutral bias.
  • The New Zealand Dollar needs a new catalyst after its recent rally ran out of steam.
  • 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 New Zealand Dollar is in a rut and is unlikely to break out either upwards or downwards as the central bank’s official cash rate looks set to remain at 1.75% for months and perhaps years to come. The Reserve Bank of New Zealand meets on Thursday morning local time and a rate move would be a huge surprise.

Instead, RBNZ Governor Graeme Wheeler will likely emphasise not just that rates will not be changed for a long time yet but also that the bank’s bias is strictly neutral, with an equal chance of the next move being an increase or a decrease. That could be as far away as late next year.

Chart: NZD/USD Daily Timeframe (2017 to Date)

New Zealand Dollar: Interest Rates on Hold Indefinitely

Chart by IG

As the chart above shows, NZDUSD has been climbing since mid-May. However, that rally has run out of steam and for the past few sessions the pair has traded sideways. That’s despite news last week of lower-than-expected GDP growth of 0.5% quarter/quarter in Q1.

The data imply that GDP growth this year could be nearer 3.0% than 3.5%. However, core inflation in New Zealand remains subdued and headline inflation is only just above the midpoint of the RBNZ’s 1%-3% target range.

This all suggests a neutral bias for NZD, although IG Client Sentiment data suggest that NZDUSD could resume its uptrend once the current consolidation period ends.

New Zealand Dollar: Interest Rates on Hold Indefinitely

Retail trader data show 20.2% of traders are net-long with the ratio of traders short to long at 3.96 to 1. In fact, traders have remained net-short since May 24, when NZDUSD traded near 0.69967; the price has moved 3.5% higher since then. The number of traders net-long was 1.5% higher on Friday than on Thursday and 14.1% lower from last week, while the number of traders net-short was 15.4% higher than Thursday and 34.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZDUSD prices may continue to rise. Traders were further net-short than Thursday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bullish contrarian trading bias.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

What will drive the currency majors in 2017’s second half? Check out the freeDailyFX Quarterly Forecasts



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