Forecasts

US Dollar: Politics to Overshadow Yellen Speech, FOMC Minutes

Fundamental analysis, economic and market themes

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US Dollar: Politics to Overshadow Yellen Speech, FOMC Minutes

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar pressured as “Trump trade” narrative continues to fizzle
  • Politics to overshadow Yellen speech, FOMC minutes, PMI surveys
  • Holiday liquidity drain might amplify volatility on major news-flow

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The US Dollar continued to retreat last week as the prospect of expansionary fiscal policy that boosts inflation and nudges the Fed into a steeper rate hike cycle continued to fade. Lawmakers in the House of Representatives passed a version of tax reform that substantially differs from the Senate version – especially after the latter baked in repeal of “Obamacare” – signaling a treacherous reconciliation process ahead.

Meanwhile, the investigation into the 2016 election conducted by Special Counsel Robert Mueller edged closer to President Trump’s inner circle. The Wall Street Journal reported that Mr. Mueller has subpoenaed documents from the Trump campaign as he tries to establish any possible collusion between it and Russia. That has stoked political instability fears, pouring cold water on hopes for legislative progress.

Looking ahead, the economic calendar offers little in the way of top tier event risk on a week shortened by the Thanksgiving holiday. November’s Markit PMI survey roundup is perhaps most noteworthy for a timely business cycle update. Fed Chair Yellen is also due to speak at Stern Business School and minutes from the latest FOMC meeting are scheduled for release.

With a December rate hike all but priced in however, politics and their influence on the 2018 monetary policy path will probably remain at the forefront. Priced-in probabilities implied in Fed Funds futures show traders see the chance of an increase at 97 percent. In fact, this measure has held above 90 percent for two weeks after a steady build since early September.

This means headlines emerging out of Washington DC are likely to continue triggering ad-hoc bursts of volatility, making for a challenging trading environment. Ebbing liquidity ahead of the holiday might dampen activity absent the emergence of a major bombshell but could also translate into sharper price swings if something truly game-changing hits the wires. Traders would be wise to proceed with caution.



Euro Looks to Hold onto Gains During US Holiday Week

News events, market reactions, and macro trends.

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Euro Looks to Hold onto Gains During US Holiday Week

Fundamental Forecast for EUR/USD: Neutral

- The Euro is proving resilient as economic data trends continue to hold up quite well as pockets of negativity have popped up for many other major currencies.

- Positioning data shows that speculators have almost ceased shedding net-long Euro contracts.

- Retail positioning points to bullish conditions for EUR/USD in the coming days.

The Euro was the second best performing major currency of the week as the calendar turned through the ides of November, with EUR/JPY the only EUR-cross that fell on the week (-0.20%). Euro gains were far and wide elsewhere, with EUR/USD adding +1.06%, EUR/AUD gaining +2.31%, and EUR/NZD surging by +2.89%. Despite no major catalysts coming out of the region, the relative stability the Euro has proven an appealing characteristic in recent weeks.

Overall, the Euro is continuing to prove resilient amid steadily improving fundamentals of the Euro-area. Economic data momentum remains positive, with the Euro-Zone Citi Economic Surprise Index finishing last week at +58.9, the same level as a week earlier and up from +54.1 a month ago.

The 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of price pressures, closed last week at 1.670%, slightly lower than the 1.679% reading a week earlier, and still higher than the 1.648% reading a month ago. Given broad Euro strength over the past few months, any signs that inflation is trending higher will ease ECB concerns over taper the pace of its asset purchases as the calendar turns into 2018.

Looking ahead, the economic calendar over the coming week will be impacted by holidays in the United States, meaning liquidity will be running thinner than normal. Likewise, there are only a few upcoming instances to look for new guidance on the Euro.

On Monday, European Central Bank President Mario Draghi will be speaking in his capacity as Chair of the European Systemic Risk Board (ESRB). On Thursday, when US markets will be completely offline, preliminary French, German, and broader Euro-Zone PMI readings will be released and are expected to show economic activity in various sectors continuing at the same pace it was in October.

The coming week shouldn’t be much of a game changer for the Euro, and in recent years, the trading conditions during the Thanksgiving holiday have proven to be unreliable and inconsistent. Traders may find conditions palatable from Monday to Wednesday, but the tail-end of the week may be best spent away from looking for significant price movements in FX markets – unless of course the news wire yields something unexpected.

See our Q4’17 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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USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Central bank policy, economic indicators, and market events.

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USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Fundamental Forecast for Japanese Yen: Bullish

USD/JPY snaps the monthly opening range during the first full-week of November, and the pair face a growing risk of giving back the advance from the 2017-low (107.32) as the U.S. economic docket is expected to highlight a subdued outlook for inflation.

With the U.S. Consumer Price Index (CPI) anticipated to slow to an annualized 2.0% from 2.2% in September, signs of easing price pressures may rattle the near-term recovery in the dollar-yen exchange rate as it limits the Fed’s scope to implement higher borrowing-costs in 2018.

USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Even though the Federal Open Market Committee (FOMC) appears to be on course to deliver a December rate-hike, a growing number of central bank officials may trim the longer-run forecast for the benchmark interest rate as inflation continues to run below the 2% target. As a result, the FOMC under current Governor Jerome Powell may adopt a more gradual approach in normalizing monetary policy as ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

With that said, market participants are likely to pay increased attention to the European Central Bank’s (ECB) first conference on central bank communications from November 14 to 15 as Chair Janet Yellen is scheduled to join a panel with President Mario Draghi, Bank of England (BoE) Governor Mark Carney and Bank of Japan (BoJ) Governor Haruhiko Kuroda, but Chair Yellen may refrain from saying anything new with her term set to expire in February.

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USD/JPY Daily Chart

USD/JPY Snaps Monthly Opening Range Ahead of U.S. CPI, Fed Rhetoric

Failure to preserve the monthly opening range brings the downside targets back on the radar for USD/JPY especially as both price and the Relative Strength Index (RSI) break the bullish formations carried over from September. The string of failed attempts to close above the 113.80 (23.6% expansion) to 114.30 (23.6% retracement) region raises the risk for a move back towards 112.30 (61.8% retracement) to 112.80 (38.2% expansion), with the next downside hurdle coming in around 111.10 (61.8% expansion) to 111.30 (50% retracement), which sits just beneath the October-low (111.65).

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GBP: Resilient Despite Bad News On All Fronts

Financial markets, economics, fundamental and technical analysis.

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GBP: Resilient Despite Bad News On All Fronts

Talking Points:

  • The British Pound has held its ground in recent days even though there has been no Brexit breakthrough and PM May’s grip on power seems increasingly tenuous.
  • That suggests a lack of interest in selling the currency and if the bad news is now in the price it could even rally.
  • Much will depend, though, on the economy – and the week is packed with important data and speakers.

Fundamental Forecast for GBP: Neutral

What Does the Fourth Quarter Hold for the Pound, Equities, Oil and Other Key Markets? Find out here

Despite the Brexit negotiations between the UK and the EU seemingly making little progress, and UK Prime Minister Theresa May losing two members of her cabinet already this month, the British Pound has been remarkably stable.

After falling sharply on November 2, after the Bank of England’s “dovish hike” in interest rates, GBPUSD has recovered most of the lost ground.

Chart: GBPUSD One-Hour Timeframe (November 1 – 10, 2017)

GBP: Resilient Despite Bad News On All Fronts

Chart by IG

Similarly, EURGBP has lost most of the gains made after that sharp move when the Bank of England hinted that any further tightening of monetary policy would be slow and gradual.

Chart: EURGBP One-Hour Timeframe (November 1 – 10)

GBP: Resilient Despite Bad News On All Fronts

Chart by IG

Against such an unpromising background, the Pound’s ability to roll with the punches has been impressive. Moreover, unless the Brexit talks break down completely, the Prime Minister is forced out of office or the Bank of England turns even more dovish, it is hard to see where any more bad news could come from.

This all suggests that the Pound could rise further but caution is called for during the most important week of the month for UK economic data. First, on Tuesday, are the inflation figures for October, which are expected to show a small rise to 3.1% from 3.0% in the year/year rate. The day after, labor-market data could show an increase in the claimant-count measure of unemployment last month, and October’s retail sales numbers, due Thursday, were probably almost flat month/month and down year/year.

In addition, several Bank of England policymakers are speaking Thursday so erring on the side of caution is probably the best course of action.

--- 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: The Battle Between the Bulls and the Bears Continues

Fundamental analysis and financial markets.

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Gold: The Battle Between the Bulls and the Bears Continues

Talking Points:

  • A breakout from the recent $1,265 - $1,290 range is becoming increasingly likely.
  • Higher US Treasury yields, ahead of a December rate hike, are weighing on the precious metal.
  • Political upheaval and a growing risk-off theme may give gold bulls the upper hand.

Fundamental Forecast for Gold: Neutral

Gold remains stuck in a narrow trading range with neither the bulls nor the bears giving an inch, while both sides press for range break which is likely coming soon. We remain on the sidelines for now, although growing risk aversion has us leaning towards a long position on a break-out.

The argument for a lower price is predicated on higher US interest rates with the target range for the Fed Fund rate likely to be moved up by 0.25% to 1.25%-1.50% at the next Federal Reserve meeting on December 13. A look at short-term US interest rates gives us a slightly clearer picture about the Fed’s interest rate policy with 2-year USTs currently trading just off a nine-year high at 1.72% while 5-year USTs are offered with a yield of 2.055%, a couple of basis points off a six-and-a-half year high. US interest rates are also expected to be hiked another three times next year, adding more downside pressure on gold.

Gold however is starting to regain its safe-haven shine as political upheaval increases and investors become more risk-averse. Venezuela is on the verge of default after missing payments on sovereign debt and bonds issued by the state-owned oil firm PDVSA, while Zimbabwe is gripped by yet another political crisis after President Robert Mugabe was placed under military custody while the army took control of the streets of Harare.

And in a sign that investors are starting to pare back on risk, investors are shunning high-yield bonds. According to the latest data from Bank of America Merrill Lynch, net outflows from high-yield bond funds rose to USD6.7 billion, the third highest outflow on record and a potential pre-cursor to a stock market correction.

The chart below shows the current bull/bear battle with neither side able to break the month-long range with the current price just above mid-range and among the ema cluster, while the stochastics indicator is at a fairly neutral level.

Chart: Gold Daily Time Frame (September 11 – November 17, 2017)

Gold: The Battle Between the Bulls and the Bears Continues

Chart by IG

IG Client Sentiment data shows 76.7% of traders are net-long with the ratio of traders long to short at 3.29 to 1. The percentage of traders net-long is now its lowest since Nov 07 when gold traded near $1,277.57. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests gold prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current gold price trend may soon reverse higher despite the fact traders remain net-long.

And you can check out our latest Q4 trading forecast for Gold here.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1



Canadian Dollar Battles Headwinds Ahead of Inflation Release

Fundamental analysis and financial markets.

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Canadian Dollar Battles Headwinds Ahead of Inflation Release

Talking Points:

  • Oil is underpinning the Loonie but US shale supply looms.
  • Friday’s inflation data will steer the central bank’s monetary policy for the rest of the year.
  • The October USD/CAD high may come back into play.

Fundamental Forecast for CAD: Neutral

We remain neutral on the Canadian Dollar but would look closely at buying USD/CAD if oil prices start to turn lower or if Friday’s inflation release disappoints to the downside. In addition, negative news surrounding the ongoing NAFTA renegotiations with the US would also weigh heavily on CAD and prompt opening a short CAD position.

The Loonie has been dragged higher lately by a resurgent oil complex with US Crude hitting a 28-month high around $58/brl earlier this week on ongoing tensions in the Middle East. However a higher crude price has bought US shale producers back to the party with the latest EIA data showing US crude production hitting an all-time high of 9.62 million barrels of oil a day in the week through November 3.

And the potential downturn in the price of oil may not be the only headwind facing the Canadian Dollar with the upcoming inflation release – Friday November 17 – likely to show consumer prices falling short of the central bank’s target of 2%. Last month inflation rose to 1.6% from 1.4% on the back of higher gasoline prices, however excluding gas prices inflation was a more lowly 1.1%, according to Statistics Canada.

The low level of inflation is also likely to stay the central banks’ hand and keep Canadian interest rates unchanged from their current level for the rest of the year. A weaker CAD would help the central bank by importing inflation and driving consumer prices higher in an economy where wage inflation remains elusive.

A look at the daily USD/CAD chart shows the pairs’ first target is the 23.6% Fibonacci retracement level at 1.27136 ahead of a larger move to the late October high of 1.29150.

Chart: USD/CAD Daily Timeframe (April 25 – November 10, 2017)

Canadian Dollar Battles Headwinds Ahead of Inflation Release

Would you like to know the Traits of Successful Traders and how to find the Number One Mistake Traders Make? If so, click here.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1



Australian Dollar Likely Stuck, But Watch For RBA Speakers

Financial markets, economics, journalism and fundamental analysis.

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Australian Dollar Likely Stuck, But Watch For RBA Speakers

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar sagged last week as weak wage data surprised the market
  • Employment growth remains strong but pay rates are lagging severely
  • This week will probably see the USD side of AUD/USD driving

The year’s final quarter is getting old. How are the DailyFX Technical and Fundamental forecasts holding up? We have nothing to hide.

Last week’s economic snapshots provided market watchers with a little macrocosm of all that plagues Australian Dollar bulls.

The country’s official October employment data came in reasonably strongly. Yes, headline job creation missed forecasts by a wide margin but that was down to a fall in part-time positions. Full-time role numbers surged and the overall jobless rate hit a low not seen since early 2013. Overall employment has expanded by 336,000 for the year so far. That’s a very impressive gain in a country with a total employed workforce of just twelve million.

And yet the Australian Dollar continues to sag against its US cousin. For, while much of the Australian economy is doing either very or reasonably well, the parts held to be most closely connected to interest-rate policy are doing a little less so.

AUD/USD was hit last week by news that wage growth remains very pallid for all the labour market’s vigour. And the latest inflation data were relatively weak too. The Reserve Bank of Australia doesn’t help much. Its key Official Cash Rate remains stuck at a record 1.50% low and official pronouncements don’t suggest its going anywhere soon. Futures markets don’t foresee a move until well into 2018. The RBA has gone out of its way to say that higher interest rates elsewhere do not necessarily force its own hand.

The RBA doesn’t want to see the Aussie get much higher, and it says so every chance it gets.

The upshot of all this for traders is that domestic economic data which don’t affect the inflation picture has little chance of moving the Aussie market much, be it strong or weak. RBA speakers, meanwhile, tend to depress the currency by publicly fretting its strength.

There are plenty of those speakers coming up this week, including Governor Lowe who will talk on Monday. They might present AUD/USD at least with some downside risk. But a lack of key US data to influence the pair from the “USD” side may make for little overall movement.

So, it’s a neutral call this week, with perhaps a little downside bias.

Australian Dollar Likely Stuck, But Watch For RBA Speakers

Meandering lower. AUD/USD, Daily Chart.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX



The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Price action and Macro.

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The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Talking Points:

Fundamental Forecast for NZD: Bearish

The New Zealand Dollar spent much of this week clawing back losses that had very much dominated the currency’s price action over the past few weeks. Bigger picture, we can really draw back to July to focus in on when the pain really started to show for the Kiwi. This is when NZD/USD was trading over the psychological level of .7500, and this came on the heels of an aggressive rally that took two-and-a-half months to build-in over 700 pips on the pair. But in the three months since, the entirety of those gains have been eradicated. This bearish move in the New Zealand Dollar saw another fresh wave of selling on last month’s news around New Zealand elections, and after catching a bounce at the 2017 low last week, prices spent most of this week trudging-higher.

NZD/USD Daily: Corrective Gains for the Kiwi After Last Week’s Bounce at 2017 Low

The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Chart prepared by James Stanley

After newly-installed Prime Minister Jacinda Ardern’s Labour party crafted a coalition with the NZ First Parties, a blip of strength had temporarily showed-up in the Kiwi spot rate. This was very much driven by the prospect of an increase in the minimum wage; with the hope being that higher wages as brought upon by legislation could force stronger rates of inflation which, eventually, can put the Reserve Bank of New Zealand in a spot where they have to hike rates. But – that strength was short-lived, as Ms. Ardern is also promoting a modification to the Reserve Bank Act, and this can radically change the way that the RBNZ does business.

The proposed change would make the RBNZ also accountable for full-employment. This would be the incorporation of an additional mandate, on top of the RBNZ’s current focus of inflation. The change would effectively put the RBNZ in a spot where they have to try to balance the forces of inflation and employment, similar to the Federal Reserve utilizing a dual mandate versus the single mandate of Central Banks like the ECB. This is also happening while lawmakers consider an additional committee to manage the cash rate, and this invites a whole host of uncertainty around the future of the Kiwi-Dollar spot rate, along with that of the RBNZ itself.

On top of all of that potential change, next week sees Interim RBNZ Governor Grant Spencer conduct his first full monetary policy statement, and this also happens to be the first RBNZ rate decision under the new Labour-led government. There are no expectations for any moves on rates, and for the next expected adjustment, markets are currently looking out to Q4 of 2018 for a potential hike. The one possible area for change at next week’s rate decision is an adjustment to inflation expectations in order to account for the weaker currency. In Graeme Wheeler’s final press conference as the head of the bank in August, the RBNZ said that they anticipate rates staying on hold until at least September of 2019. Since then, we’ve seen inflation come-in at 1.9% versus the RBNZ’s projection of 1.6%, and the additional slide in NZD will likely necessitate a small adjustment for forward-looking inflation figures.

While stronger rates of inflation could eventually drive rates-higher, the prospect of change within the Reserve Bank Act will likely continue to dampen demand for NZD, at least in the near-term, as the rest of the world becomes more familiar with what a Jacinda Ardern-led New Zealand will end up looking like. The one thing that does appear certain is that Ms. Ardern is not satisfied with business as usual, and this can lead to further change. Markets, generally speaking, abhor change as this presents risk; and while the potential around those changes remain uncertain, we will likely see some element of risk aversion until market participants can gain more clarity. The forecast for next week will be set to bearish on the New Zealand Dollar.

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

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