Forecasts

US Dollar Will Try To Build on Post-FOMC Gains. Will It Succeed?

Fundamental analysis, economic and market themes

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US Dollar Will Try To Build on Post-FOMC Gains. Will It Succeed?

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar as scope to extend gains as Fed rate hike prospects firm
  • Fed commentary, US GDP and PCE data may boost the greenback
  • Tightening prospects outside the US may limit the Dollar’s gains

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The US Dollar was spared a fifth consecutive week of losses, with the Fed monetary policy announcement helping prices to rebound from a 15-month low. Chair Janet Yellen and company stood by near- to medium-term rate hike projections despite disinflation in the first half of the year, which markets saw as comparatively hawkish (as expected). They also announced the start of “quantitative tightening” (QT).

The priced-in probability of another rate increase before year-end now stands at 63.2 percent. While this is a marked increase from 46.7 percent recorded just a week ago, it still this leaves ample space for further certitude to make its way into the forecast and thereby boost the greenback. With that in mind, traders will be keen to size up a slew of speeches from central bank officials and a sprinkling of top-tier economic data.

The speaking docket is packed, with policymakers from across the FOMC bias spectrum including Yellen due to opine on the economic outlook. As for data, the final revision of the second-quarter GDP reading and August’s PCE inflation gauge – the US central bank’s favored way to track price growth – will cross the wires. Narrow improvements are expected on both fronts.

US data flow has steadily improved relative to consensus forecasts since mid-June, hinting that analysts’ models may be understating the economy’s vigor and establishing a cautious bias favoring more of the same. Investors may upgrade their own conviction in further hikes if this is matched by a confident tone from the broad range of Fed speakers, boosting the US currency.

Stimulus withdrawal prospects may not be supportive in isolation however, meaning the Dollar might struggle to capitalize even as rate hike expectations strengthen if other central banks are seen playing catch-up with the Fed. High-profile speeches from ECB President Draghi as well as BOE and BOC Governors Mark Carney and Stephen Poloz stand out in this regard.

The Eurozone’s monetary authority will decide on the fate of its QE asset purchases next month, with many market participants seemingly primed for a cutback. Meanwhile, the BOC has launched its own rate hike cycle recently and the BOE has signaled it is preparing to follow suit in the near term. Bargain-hunting in the early stages of tightening outside the US may prove too compelling to pass up for investors.



Euro Turns to CPI, PMI Data Ahead of German Elections

News events, market reactions, and macro trends.

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Euro Turns to CPI, PMI Data Ahead of German Elections

Fundamental Forecast for EUR/USD: Neutral

- The final August Euro-Zone CPI reading on Monday should show a modest increase from the preliminary reading, in line with what have been rising medium-term inflation expectations.

- German elections next weekend pose little risk to the Euro as German Chancellor Angela Merkel is expected to win another term with relative ease.

- According to the CFTC’s latest COT report, net-long Euro positions among speculators fell by over -10% through the week ended September 12.

The Euro gained ground against the Japanese Yen and the Swiss Franc last week, but that was it; all of the other major currencies gained ground versus the Euro. By the looks of it, even though there are several notable events due out on the calendar ahead, the Euro may not be in the driver’s seat of its own destiny.

Even though the European Central Bank sent strong signals that it would be announcing a taper to its QE program just days earlier at their September policy meeting, it seems that market participants have fully priced this eventuality into the Euro, and have started to take profit after a multi-month rally: with no new bullish catalyst last week, speculators cut their net-long Euro positions

Generally, however, fundamental drivers for the Euro appear to be moving in the right directionhelping keep traders in a ‘buy-the-dip’ mindset with regards to the Euro. Euro-Zone economic data has been modestly outperforming expectations, as measured by the Citi Economic Surprise Index. The Euro-Zone CESI inched up to +18.4by the end of the week, up from +9.9 a month earlier. We’ll see if this positive data momentum has translated into improvement in growth conditions with the release of the preliminary September Euro-Zone (and individual country) PMIs on Friday.

Elsewhere, the 5-year, 5-year inflation swap forwards, a measure of medium-term inflation (and one of ECB President Draghi’s preferred gauges) closed last week at 1.620%, higher than the 1.591% reading a month ago. This bodes well for incoming inflation data on Monday, which is supposed to show that the final August Euro-Zone CPI reading ticked up to +1.5% from +1.3% (y/y). Given broad Euro strength over the past few months, any signs that inflation is picking up will do great service to ease ECB concerns over reducing its monetary stimulus.

At the tail end of the week, attention for the Euro will shift to the German general election, which has been a non-issue: German Chancellor Angela Merkel, the steward of the Euro during its dark years after the Global Financial Crisis, looks like she will comfortably win. The Catch-22 is that her main political rival in the election, Martin Schulz, is equally if not more pro-European fiscal integration that she is. Either way, the next chancellor of Germany will be someone who isn’t a Eurosceptic.

Accordingly, with the September FOMC meeting this Wednesday, it appears that the Euro is ready to be overshadowed, not due to a lack of important fundamental drivers on its own side, but simply because the outcomes resulting from upcoming events and data on its side appear already priced in.

See our Q3’17 Euro forecast - check out the DailyFX Trading Guides.

--- 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.

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The Bank of Japan Adds a New Dove to the Dole – CPI on Deck

Price action and Macro.

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The Bank of Japan Adds a New Dove to the Dole – CPI on Deck

Fundamental Forecast for JPY: Neutral

Talking Points:

The Japanese Yen posted a string of losses against most major currencies this week, with a trough-to-peak move of approximately 200 pips in USD/JPY. The pair gapped-higher on the Sunday open for the second consecutive week and continued to run-higher. That gap never filled, and after a fresh two-month high posted at 112.71, a bit of a pullback began to show after a report around North Korea indicated that the country may be looking to detonate a hydrogen bomb over the Pacific Ocean to further prove their nuclear capabilities.

The big economic item in the headlines out of Japan this week was the Bank of Japan rate decision on Thursday morning, just after the Federal Reserve’s meeting. As has become usual, this rate decision was largely uneventful. This has become somewhat of the norm for a Bank of Japan that walked into a trap of negative rates early last year; and more recently we’ve seen a concerted effort from the BoJ to be more open and transparent in the effort of avoiding the ‘shock factor’ that the sudden move to negative rates had produced.

The one noteworthy occurrence at that rate decision was a single dissenting vote. And that dissenting vote came from newly-installed board member, Gouishi Kataoka, who argued that the BoJ is not doing enough to stimulate inflation within the economy. This is a stark change of pace: Dissent within the BoJ isn’t all that out of the norm, as Takahide Kuichi and Takehiro Sato, both of whom had terms that ended in July, were consistently going against the grain. But that dissent was largely coming from a more-hawkish perspective, while Mr. Kataoka is arguing for even more stimulus to help the BoJ reach their 2% inflation goal. In a research paper published last year entitled “A Reboot of Reflationary Policy is Wanted,” he argued for greater fiscal spending from the Japanese government along with putting off a planned increase for sales taxes, currently scheduled for 2019.

This puts an already dovish Bank of Japan in an even more dovish state as we no longer have the hawkish dissent at these rate decisions that could make the prospect of stimulus exit or higher rates seem a bit more likely. Also of interest is the fact that many other major Central Banks appear to be well under-way with their approach back from stimulus: The Bank of England is considering higher rates, many expect the ECB to begin tapering their own stimulus outlay later this year and the Federal Reserve just announced that they’re going to begin trimming the balance sheet. This divergence highlights the Japanese Yen as an attractive funding currency. While growth remains rather attractive in Japan, with the country currently seeing GDP growing at an annualized 2.5% clip, inflation continues to lag. In August, we saw July inflation print at an annualized .4% rate for the fourth consecutive month. This furthers the theme that we’ve seen since 2015 where Japanese inflation remains persistently weak even despite the massive stimulus efforts from the Bank of Japan.

The big item on next week’s calendar out of Japan is inflation for the month of August, set to be released on Thursday evening (Friday morning in Europe and Japan). Given that we’ve just gotten a fresh dose of dovishness from the BoJ, this would likely need to be shockingly-high to directly elicit Yen strength, as the .4% inflation that we’ve seen for the past four months is well-below the BoJ’s 2% target and keeps the BoJ in a position to remain as one of the more dovish global Central Banks.

More problematic for Yen bears could be the continued crisis around North Korea. As those worries appeared to abate around last week’s open, continuing through this week; North Korea does not look ready to recede behind the headlines. On Friday morning, the country pledged to detonate a hydrogen bomb over the Pacific Ocean. While this might not sound like a big deal on its face given that we’ve very recently heard about multiple hydrogen bomb tests in the country, NK’s use of ‘Pacific Ocean’ could imply Japan. We’ve already seen two missiles launched over the Northern part of the country in Hokkaido (not carrying nuclear warheads, however); and if North Korea is truly wanting to test a hydrogen bomb over the Pacific and not underground, as such tests normally take place, this would also infer that the country is looking to use its recently harnessed missile technology to carry a nuclear-tipped warhead in the effort of proving their range of operations (likely trying to create fear with their ability to reach the United States). This is a big deal: Missiles and warheads are often tested separately because of how incredibly dangerous it is. The United States has only done one such test, and that was in 1962 from a submarine in the middle of the Pacific Ocean. Even then, the warhead had to be modified before use, and this was an SLBM (submarine-launched ballistic missile) rather than an ICBM (inter-continental ballistic missile). China performed a similar test in 1966, but since then – the world has not seen a live fire test of a rocket-powered nuclear warhead.

This could be bad for risk markets, and this could elicit Yen strength. The bigger question is for how long, as we’ve seen those recent worries around the Hermit Kingdom carry a diminishing marginal impact under the presumption that Kim does not want to ultimately become the agent of his own destruction. If a mistake does happen, and given the risk around such a scenario which is astoundingly high and the dominant reason that such tests do not take place more often - this could be a world-changing event.

The forecast for the Japanese Yen will be set to neutral for the week ahead.

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

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GBP: Likely to Take a Breather as Brexit Talks Resume

Financial markets, economics, fundamental and technical analysis.

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GBP: Likely to Take a Breather as Brexit Talks Resume

Talking Points:

  • In a relatively quiet week for UK economic data, sterling traders’ attention will likely focus on the next round of Brexit talks that begin Monday.
  • The data highlight will be the release of the final reading of UK Q2 GDP.
  • Further out, there is a clear risk that the Bank of England will tighten monetary policy at its meeting on November 2.

Fundamental Forecast for GBP: Neutral

Brexit talks restart Monday in the wake of UK Prime Minister Theresa May’s long-awaited speech in Florence Friday, in which she offered no new concessions to the EU, failed to specify a sum of money the UK would pay the EU as part of a divorce bill and was generally vague on detail.

In response, the EU’s chief negotiator Michel Barnier praised the “constructive spirit” of her comments but asked for more clarity – a stance likely to be repeated when the negotiations resume on the UK’s exit from the European Union.

Those talks will likely be the highlight of the coming weak, which is short of economic data. The only official data of note will be the final figures for second-quarter economic growth Friday, although the Confederation of British Industry will also publish its distributive trades survey Wednesday and GfK will report on UK consumer confidence Thursday.

While political uncertainty and sluggish economic growth might argue for a weaker British Pound, it seems unlikely to lose much of the gain made so far this year against the US Dollar, largely because there is a clear risk that the Bank of England will tighten monetary policy at the November 2 meeting of its rate-setting monetary policy committee.

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

GBP: Likely to Take a Breather as Brexit Talks Resume

Chart by IG

While that meeting is still more than a month away – there is no MPC gathering in October – it is bound to become more and more of a focus for GBP traders in the weeks to come. In the meantime, GBP/USD looks set to continue its recent move sideways.

--- Written by Martin Essex, Analyst and Editor

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

Follow Martin on Twitter @MartinSEssex

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Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

Short term trading and intraday technical levels

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Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

Fundamental Forecast for Gold:Neutral

Gold prices fell for the second consecutive week with the precious metal down more than 2.1% to trade at 1295 ahead of the New York close on Friday. The losses come on the back of FOMC interest rate decision where Chair Yellen & Co reaffirmed expectations for another rate hike in 2017 and announced the commencement of the balance sheet offload (quantitative tightening) starting next month. While the prospects for higher rates are likely to weigh on bullion prices, rising geopolitical tensions may limit the magnitude of the decline.

The Federal Reserve released its 4th quarter projections this week and although the committee did upwardly revised their year-end GDP forecast to 2.4%, they lowered inflation expectations with Core PCE (Personal Consumption Expenditure) revised lower to just 1.5% from 1.7%. This was the second consecutive reduction we’ve seen in the Fed’s inflation forecast and continues to suggest the central bank remains uneasy with the continued softness in price growth.

It’s also worth noting that the interest rate dot-plot suggests the Fed remains committed to one more hike this year, expectations for the terminal or longer-run rate were lowered with the median forecast now calling for a nominal rate of 2.75%. The point is that although markets did need to reprice the December, the end rate suggests the glide path will likely be even slower than expected. That said, look for USD gains to be limited. From a technical standpoint, the prices do remain at risk near-term with the decline likely to offer favorable points of entry for the bulls.

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Gold Prices Plunge as Fed Embarks on QT- Support Targets in View
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +2.34 (70% of traders are long)- bearish reading
  • Long positions are 7.0% higher than yesterday and 6.6% higher from last week
  • Short positions are 0.6% lower than yesterday and 0.6% lower from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

Learn how to use Gold sentiment in your trading.Get more information on Sentiment here Free!

Gold Weekly

Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

Gold prices reversed from basic slope resistance earlier this month with the decline now testing the 2017 opening-range high at 1295. A weekly close above this threshold would give prices hope of a near-term rebound. Critical long-term resistance remains at 1380/91.

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Gold Daily

Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

Last week we highlighted that prices had, “set a clean monthly opening-range just above basic trendline support and we’ll be looking for a break of this region for further guidance on the near-term outlook.” A break early in the week kept the near-term focus lower in prices with the decline taking gold back below the June highs. Interim support is eyed at 1281 backed by more a more significant confluence at 1263/68. Key resistance & near-term bearish invalidation stands at 1325- a close above that threshold would be needed to mark resumption of the broader up-trend.

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Gold 240min

Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

Gold Prices Plunge as Fed Embarks on QT- Support Targets in View

A closer look at price action highlights gold prices continuing to trade within the confines of this well-defined descending channel formation. The break below the monthly opening range has us looking for a near-term low next week. That said, be mindful of rallies sub-1304 with a move lower targeting the aforementioned support targets.

Bottom line: look for sideways to lower price action early next week with a breach above channel resistance needed to suggest a larger recovery is underway.

---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.



CAD Rally: Too Much, Too Soon?

Fundamental analysis and financial markets.

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CAD Rally: Too Much, Too Soon?

Talking Points:

  • USD/CAD falls to lows seen in May 2015 on Rate Hike
  • Further hikes are being mooted but will the BoC wait?
  • USD weakness is exacerbating the move.

Fundamental Forecast for CAD: Neutral

We remain neutral on CAD although any further sharp upward moves may open the opportunity to sell CAD against the USD for a short-term reversal. USD/CAD has fallen 12% in the last four months – from 1.3790 to 1.21350 – while the USD Dollar Basket has fallen 7.6% over the same timeframe.

The Bank of Canada (BoC) has hiked rates by 0.25% at both of the last two policy meeting (July and September) leaving commentators divided over the timing of the next move. Commentating on this week’s hike, the central bank noted that recent economic data had been ‘stronger than expected’ supporting the bank’s view that growth in Canada is becoming ‘more broadly-based and self-sustaining’. However the governing council also noted that there was some excess capacity in Canada’s labour market, while given elevated household indebtedness, ‘close attention will be paid to the sensitivity of the economy to higher interest rates’.

The next meeting on October 25 also coincides with the latest quarterly Monetary Policy Report where BoC governor Stephen Poloz will give updated guidance on the economy, including inflation projections.

Looking at the weekly USD/CAD chart the strength of the Loonie can be clearly seen, but the last sharp downturn after this this week’s hike has left a ‘gap’ that needs filling back to 1.23380 before the Loonie can appreciate further. Further upside resistance comes in the form of July’s old ‘triple-bottom’ at 1.24120 while the May 2015 low at 1.19190 is the first target for CAD bulls.

Chart: USD/CAD Daily Time Frame (May – September 8, 2017)

CAD Rally: Too Much, Too Soon?

Chart by IG

And you can check out our latest Q3 trading forecast for the Canadian Dollar here.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1



Australian Dollar Looks Set To Hang On At The Heights

Financial markets, economics, journalism and fundamental analysis.

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Australian Dollar Looks Set To Hang On At The Heights

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar is clearly well supported near its highs
  • The generally stronger US Dollar tone has not so far made much difference
  • This week offers no obvious traps, but no clear upward markets either

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The Australian Dollar remains confined to a quite narrow band against its US cousin and, on a fundamental view, there seems precious little chance of that band breaking anytime soon.

Investors have had ample time to digest the US Federal Reserve’s September monetary policy decision, Although it seems to have led to some general US Dollar strength, AUD/USD remains quite close to its highs for 2017 (that was the US$0.8117 hit on September 8). The US central bank’s base case remains that there’ll be four, quarter-point interest rate rises between now and the end of 2018- even if the market still sees rather fewer. The Australian currency retains a slim yield advantage over the greenback. Australian rates aren’t forecast to move until well into 2018 and, when they do, they are expected to rise from their current 1.50% record lows.

In essence, that pair remains where it has been for weeks now. It’s stuck between clear underlying appetite to own the Australian currency even at relatively elevated levels -we’re currently in a region ill frequented since way back in 2015 after all- and worries that Reserve Bank of Australia doesn’t want to see its currency get much stronger.

The coming week doesn’t offer anything at all in terms of first-tier Australian economic data and, although investors will hear from one or two RBA luminaries, Governor Philip Lowe is not on the sked. His last public appearance was in Perth on September 21.

All that probably means is that the “USD” side of AUD/USD will continue to drive. There are plenty of heavyweight US economic releases on the sked, including a second look at second-quarter Gross Domestic Product. We’ll also hear from Fed Chair Janet Yellen again. She’s down to speak on Tuesday. While the pair may very well move on any of the above, it’s tough to spot anything likely to break the current, well-entrenched trading pattern. So, yet another neutral call it has to be.

Australian Dollar Looks Set To Hang On At The Heights

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX



NZD/USD Bid Ahead of Election- Outlook Hinges on RBNZ Policy

Central bank policy, economic indicators, and market events.

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NZD/USD Bid Ahead of Election- Outlook Hinges on RBNZ Policy

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar remains bid ahead of the election as opinion polls show Prime Minister Bill English as the favored candidate, but fresh remarks from the Reserve Bank of New Zealand (RBNZ) may sway the near-term outlook for NZD/USD as the central bank appears to be on course to preserve the record-low cash rate throughout 2017.

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Despite the change in leadership, Deputy Governor Grant Spencer may strike a similar tone as his predecessor, Graeme Wheeler, as ‘numerous uncertainties remain and policy may need to adjust accordingly.’ As a result, the, the RBNZ is widely expected to retain the current policy at the September 28 meeting and the central bank may merely attempt to buy more time as ‘GDP in the March quarter was lower than expected, adding to the softening in growth observed at the end of 2016.’ It seems as though the RBNZ will continue to lag behind its U.S. counterpart as the Federal Open Market Committee (FOMC) shows a greater willingness to implement another rate-hike in 2017, and the kiwi-dollar exchange rate may exhibit a bearish behavior going into the end of the month should Deputy Governor Spencer and Co. tame expectations for higher borrowing-costs.

At the same time, the RBNZ may toughen the verbal intervention on the local currency as ‘a lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth,’ and the kiwi-dollar exchange rate stands at risk of giving back the advance from earlier this month if the central bank threatens to intervene in the currency market.

NZD/USD Daily Chart

NZD/USD Bid Ahead of Election- Outlook Hinges on RBNZ Policy

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The recent advance in NZD/USD has largely negated the risk for a head-and-shoulders reversal as the pair pushes to a fresh monthly-high (0.7433) and clears the near-term hurdle around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion). In turn, topside targets remain on the radar going into the last full week of September, but a string of failed attempts to test the 0.7470 (50% expansion) region may generate range-bound conditions, with the 200-Day SMA (0.7143) on the radar, which sits just above the Fibonacci overlap around 0.7100 (38.2% retracement) to 0.7110 (38.2% expansion).

Retail Sentiment

NZD/USD Bid Ahead of Election- Outlook Hinges on RBNZ Policy

See how shifts in NZD/USD retail positioning are impacting trend- Click here to learn more about sentiment!

Retail trader data shows 63.4% of traders are net-long with the ratio of traders long to short at 1.73 to 1. The number of traders net-long is 2.7% lower than yesterday and 2.8% lower from last week, while the number of traders net-short is 3.0% higher than yesterday and 6.9% lower from last week.

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