Forecasts

US Dollar Rally May Regain Momentum Amid Trade War Worries

Fundamental analysis, economic and market themes

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FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

  • US Dollar rally stalls as markets shrug off trade war worries
  • Growing tensions may revive haven demand in the week ahead
  • US GDP revision, PCE data may not trigger strong response

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Last week, haven demand lifted the US Dollar amid worries about the escalating trade tensions as expected. The move higher would prove short-lived however. The currency touched an 11-month high against an average of its top counterparts only to retreat and close the week essentially flat.

Traders appear willing to overlook growing tensions between the US and its top trading partners for now. Perhaps they have reasoned that bellicose tactics employed by President Donald Trump will yield to deal-making before long, echoing recent rapprochement with North Korea after months of intense sparring.

That seems fanciful. The targets of Mr Trump’s ire are not as likely as Kim Jong-un to trade a media coup for nominal de-escalation. Officials in Canada and the EU must demonstrate strength to the own electorates, and China possesses retaliation levers that Pyongyang does not.

Background - A Brief History of Trade Wars, 1900-Present

Friday marked implementation of retaliatory EU tariffs responding to a hike in US duties on aluminum and steel. President Trump threatened to up the ante via Twitter, saying a 20 percent levy on cars imported from the region would soon follow if the regional bloc does not back off.

EU leaders gathering for a summit next week may unveil wider-reaching countermeasures as Mr Trump digs in. Preliminary meetings between German Chancellor Merkel and French President Macro as well as her coalition partners may offer a steady stream of soundbites keeping trade wars in the headlines.

Meanwhile, China has hinted via official news outlets that it will aim its response to US trade barriers at blue chip corporates. The goal is to inspire their considerable lobbying efforts to be directed at nudging the President to soften his stance.

A report from the US Treasury department outlining investment restrictions and export controls on Chinese investment in strategic technologies and industries may well spur Beijing into action. It is due by week’s end but the famously vocal and hyperactive Mr Trump may opt to lock horns on the matter earlier.

US Dollar vs Major Currencies Chart - Daily

All this suggests that safety-seeking capital flows may soon re-energize the greenback. As jousting continues to play out in the public eye, the markets may find it hard to ignore the threat that serious disruption of mainline supply chains poses for global growth.

On the data docket, revised first-quarter GDP figures and the Fed’s favored PCE inflation gauge are on tap. Absent improbably dramatic deviations from consensus forecasts, these are unlikely to alter the expected path of monetary policy and might fade into the background as trade wars take center stage.

FX TRADING RESOURCES

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



Euro Forecast: Euro Eyes Sintra ECB Forum for Next Cues

News events, market reactions, and macro trends.

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Euro Forecast: Euro Eyes Sintra ECB Forum for Next Cues

Fundamental Forecast for EUR/USD: Neutral

- The ECB’s decision to taper their QE program came as a surprise to no one, but traders walked away disappointed – and the Euro showed it – when forward guidance ruled out a rate hike before June 2019.

- The economic calendar is decidedly quieter this week, with focus on the ECB forum in Sintra, Portugal and preliminary June Eurozone PMI data on Friday.

- The IG Client Sentiment Index now suggests a bearish outlook for EUR/USD as retail traders try to buy the dip following Thursday’s collapse.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

The Euro was one of the worst major performing currencies last week, dropping against all of the majors but for the Australian and Canadian Dollars (EUR/USD +0.55%, EUR/CAD +0.42%). Losses were driven by the European Central Bank rate decision on Thursday, which while delivering the promise of the end of asset purchases after December 2018 also made clear that no rate hike would be coming before “summer 2019” at the earliest.

With forward guidance essentially ruling out a rate hike in the next 12-months, the theme of policy divergence is exerting itself again: by the time the ECB raises rates in 2019, the Federal Reserve will likely have raised by another 100-bps. The widening of US Treasury yields relative to their European counterparts should keep EUR/USD capped, if not facing downside pressure, for the foreseeable future.

Traders will get greater insight into the ECB’s decision making process this week when policy officials convene in Sintra, Portugal for the annual ECB forum. The main focus this year is on inflation and wage growth. Considering that the ECB’s main reason for keeping rates low is to fight perpetual deflationary pressures, comments made by President Mario Draghi or Chief Economist Peter Praet this week at the conference have a strong chance of moving markets (although it seems very unlikely that any commentary made will unwind EUR/USD’s loss from Thursday).

Beyond the Sintra ECB forum, market participants are staring down a mostly empty calendar; the only data we’ll be watching this week are the preliminary June PMI readings due out on Friday. According to consensus forecasts compiled by Bloomberg News, none of the French, German, or Eurozone PMI readings will tick higher relative to their final May readings. Overall, economic data momentum for the Eurozone remains week per the Citi Economic Surprise Index, which closed last week at -97.2.

Lastly, as has been the case for several weeks, oversaturated positioning is no longer the major factor it was at the start of Q2’18. Speculators held +88.2K net-long Euro contracts through the week ended June 12, a -42% decline from the all-time high set during the week ended April 17 (+151.5K contracts).

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--- 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.



USD/JPY Breaks the June Bullish Trend Despite Continued Inflation Lag

Price action and Macro.

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Talking Points:

Fundamental Forecast for JPY: Neutral

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USD/JPY Breaks the June Trend

It was a week of pullback for USD/JPY, as the Yen caught a bid in the early portion of the week as risk aversion started to show across global markets. This led to rather concerted drops in pairs like GBP/JPY or EUR/JPY shortly after this week’s open; but support caught in each pair early on Tuesday morning and prices put in a bit of recovery as we moved towards the end of the week. In the major pair of USD/JPY, a prior up-trend was nullified by that Sunday/Monday selling, and USD/JPY broke below a bullish trend-channel that had built in the first half of June. After a recovery, resistance came in from the underside of that channel, leading to a fall back-below the vaulted psychological level of 110.00.

USD/JPY Four-Hour Chart: Break-Below June Bullish Channel, Back-Below 110.00

usd/jpy usdjpy four hour chart

Chart prepared by James Stanley

Japan Inflation Remains Subdued After Earlier-Year Spike

The big data item this week out of Japan was inflation for the month of May, which was released to a slight improvement from last month’s .6% print to come-in at .7%. But – this is still well-below the earlier-year levels of 1.4 and 1.5% that printed during January and February; and this further raises questions around the effectiveness of the BoJ’s current QE policy given the recent inflation slowdown despite the fact that the bank remains near ‘pedal to the floor’ levels of accommodation.

This continued lag in inflation also helps to remove any additional motivation that might be building to look towards a nearby stimulus exit. This can help the currency to continue functioning as an attractive funding vehicle in ‘risk on’ types of market environments; while also making Yen-strength a likely theme during periods of risk aversion, as those ‘carry trade’ bets leave the market for safer harbors.

Japanese Headline CPI Comes in at .7% For the Month of May, 2018

Japan Headline CPI by Month Since January 2017

Chart prepared by James Stanley

Next Week’s Drivers

Next week’s economic calendar out of Japan is rather light, with no high-impact announcements on the docket and a smattering of medium-impact releases set throughout the week. BoJ meeting minutes are released shortly after the Sunday open, and retail trade numbers, industrial production and consumer confidence are released on Wednesday, Thursday and Friday of next week.

DailyFX Economic Calendar: High-Impact JPY Events for Week of June 25, 2018

DailyFX Economic Calendar High-Impact Events for JPY Week of June 25, 2018

Chart prepared by James Stanley

The more pronounced drivers will likely emanate from global risk trends. US equities have seen various forms of bearish price action since last weeks’ FOMC and ECB rate decisions, and this has a tendency to help to produce Yen-strength. If we do see a continuation of risk aversion in key risk markets such as US stocks, that can keep the bid behind the Yen for the near-term. On the other hand, should we see a return of the risk-on trade, Yen weakness may become attractive again under the drive that the BoJ will likely remain as one of the more loose and passive Central Bank’s in the world, as afforded by a continued lag with inflationary pressure.

The forecast for next week will be set to neutral.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

Contact and follow James on Twitter: @JStanleyFX



GBP: Bullish Momentum Aided by Hawkish Bank of England

Fundamental analysis and financial markets.

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Sterling Talking Points:

  • MPC decision sees the BoE’s chief economist turn hawkish.
  • Brexit talks may derail the latest rally.

The DailyFX Q2 GBP Forecast is available to download.

Fundamental Forecast for GBP: Bullish

The latest Bank of England voting pattern took the market by surprise with the central bank’s chief economist turning hawkish, changing the vote intention pattern to 6-3 from a previous - and expected - 7-2. In addition, the MPC said that they would consider beginning winding down the total QE stock when interest rates hit 1.5% from a previous level of 2%. Added together, and with a slightly weaker US dollar complex, GBPUSD rose from a low of 1.3100 to a current level of just under 1.3300.

On the horizon, the latest EU Summit on June 28-29 with Brexit likely to dominate proceedings, along with ongoing discussions over immigration and trade wars. The UK continues to put forward plans to leave the EU but the EU’s negotiating committee has been unbending and is still demanding clarity over the Irish border situation. Time is running out for progress to be made and continued uncertainty will take the gloss off Sterling post-Summit.

The UK data calendar does not contain any heavyweight releases with the final Q1 print at the end of the week expected unchanged. The BoE reiterated this week that it expects Q2 growth to rise from 0.1% to 0.4% and that the first quarter’s weakness was due to bad weather. Bank of England governor Mark Carney speaks on Wednesday about the Financial Stability Report although he is not expected to drift too far from the subject.

DailyFX Economic Calendar for the week ahead.

GBP-crosses have had a good week, especially against NZD and CAD where they have continued the recent uptrend, and are likely to consolidate and push further ahead over the coming weeks. A convincing break against the US dollar above 1.3300 leaves the pair room to move back to 1.34580, while on the downside the recent 1.3215 low print will act as support.

GBPUSD Price Chart Daily Timeframe (January – June 22, 2018)

GBP: Bullish Momentum Aided by Hawkish Bank of England

We run a Key UK Events and Markets Webinar every Monday at 11.30 am where we discuss a range of UK asset markets and Sterling crosses.

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1



Gold Price Sell-off Deepens despite Rising Tariff, Trade War Concerns

Short term trading and intraday technical levels

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Fundamental Forecast for Gold: Neutral

Gold prices are down for the second consecutive week with the precious metal off more than 0.70% to trade at 1269 ahead of the New York close on Friday. The decline comes alongside losses in global equity markets this week as mounting geo-political tensions regarding a looming trade war continue to weigh on risk appetite. Interestingly, gold has not served as ‘safe haven’ for traders with prices still under pressure after last week’s outside weekly reversal.

Tariffs Stoke Trade War Concerns

The intensification of rhetoric between China and the U.S. has continued to weigh on market sentiment as investors weigh the impact of an all-out trade war between the world’s largest economies. While these concerns would typically be supportive for the yellow metal, expectations for higher rates and persistent strength in the US Dollar have kept prices under pressure with gold breaking to fresh yearly lows this week.

Things have been quiet on the data front but look for that to change next week with U.S. Durable Goods Orders and the third and final read on 1Q GDP on tap. Highlighting the economic docket will be the May read on Core PCE (personal consumption expenditure) on Friday. Consensus estimates are calling for an uptick in the Fed’s preferred inflationary gauge to 1.9% y/y. A strong print here would likely see traders continue to price in a fourth rate-hike from the central bank this year- a scenario that would weigh on gold prices.

As it stands, expectations are for a 25bps hike in September with December Fed Fund Futures hovering just under 50%. That said, there’s room for adjustment and strong US data will continue to fuel these expectations. Keep in mind that the central bank will now be holding press conferences at each policy meeting and offers committee members more flexibility with respect to the timing of subsequent hikes. For gold, the focus is on technical support just lower and while prices may see a near-term reprieve next week- the broader risk remains weighted to the downside… for now.

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Spot Gold IG Client Positioning

Gold Trader Sentiment
  • A summary of IG Client Sentiment shows traders are net-long Gold- the ratio stands at +5.54 (84.7% of traders are long) –bearishreading
  • Long positions are 4.7% higher than yesterday and 8.0% higher from last week
  • Short positions are 4.4% lower than yesterday and 9.5% 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 positioning and recent changes gives us a stronger Gold-bearish contrarian trading bias from a sentiment standpoint.

Review Michael’s educational series on the Foundations of Technical Analysis: Building a Trading Strategy

Gold Weekly Price Chart

Gold Weekly Price Chart

Gold prices posted an outside weekly reversal off resistance off yearly open resistance earlier this month with the subsequent decline now approaching a series of parallels which could offer some near-term support. The region of interest is 1255/60. Keep in mind that weekly momentum has fallen to its lowest levels since January 2017 and further highlights the downside risk for bullion.

A break below this slope targets the 50% retracement of the late 2016 advance at 1245 backed closely by the 200-week moving average / trendline support at ~1235. Weekly resistance stands at 1285 with bearish invalidation steady at the 52-week moving average / 2018 open at 1298/1302.

Bottom line: A break of the June opening range has me looking for a late-month low in price. That said, look for possible recovery next week to offer more favorable short-entries while below the yearly open. For a complete technical breakdown of the near-term Gold price levels (daily & intraday), review this week’s XAU/USD Technical Outlook.

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

Follow Michaelon Twitter @MBForex or contact him at mboutros@dailyfx.com



USD/CAD to Eye 2018-High on Hawkish FOMC Rate Hike

Central bank policy, economic indicators, and market events.

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Image of USDCAD 2-Hour chart

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD holds near the monthly-high (1.3067) as the unexpected contraction in Canada Employment dampens bets for an imminent Bank of Canada (BoC) rate-hike, and the pair stands at risk of making a more meaningful run at the 2018-high (1.3125) especially if the Federal Open Market Committee (FOMC) delivers a hawkish rate-hike next week.

All eyes are on the FOMC interest rate decision scheduled for June 13 as the central bank is widely expected to deliver a 25bp rate-hike, and the fresh updates from Chairman Jerome Powell and Co. are likely to influence the near-term outlook for USD/CAD as Fed officials pledge to phase out the forward-guidance for monetary policy.

Image of Fed dot plot

Market participants are likely to turn their attention to the Fed’s longer-run interest rate forecast (dot-plot) as the central bank persistently warns ‘that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,’ and a material adjustment to reflect a more aggressive hiking-cycle should boost the appeal of the greenback as households and businesses prepare for higher borrowing-costs.

However, recent comments from the FOMC suggest the central bank is in no rush to extend the hiking-cycle as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term,’ and minor changes in the Summary of Economic Projections (SEP) may drag on the greenback as market participants scale back bets for four rate-hikes in 2018. As a result, ongoing projections for a neutral Fed Funds rate of 2.75% to 3.00% may produce a near-term correction in USD/CAD as it suggests that the FOMC will continue to tolerate above-target price growth for the foreseeable future.

USD/CAD Daily Chart

Image of USDCAD daily chart

Bear in mind, the near-term outlook has become clouded with mixed signals as USD/CAD appears to be stuck in a narrow range, while the Relative Strength Index (RSI) continues to track the bearish formation carried over from earlier this year. With that said, a series of failed attempts to close above the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region raise the risk for a move towards 1.2830 (38.2% retracement), with a break/close below the state region opening up the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion). The next downside region of interest comes in around 1.2620 (50% retracement) followed by the overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement).

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Australian Dollar’s 360 Degree Hammering Likely To Continue

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Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar’s interest rate differential position arguably worsened last week- and it was pretty bad to begin with
  • The RBA dropped a telling phrase from its minutes
  • Growing trade tensions didn’t help either.

Join our analysts for live, interactive coverage of all major Australian economic data and interest rate decisions at the DailyFX Webinars.

The Australian Dollar limps into a new trading week buffeted by what might be termed a perfect storm.

Internally the currency has absolutely no support from its central bank. Indeed the minutes of the Reserve Bank of Australia’s June monetary policy meeting actually dropped the once-fixed assertion that the next move in rates is more likely to be up than down. Let’s not overplay this, the central bank probably still thinks that the next time rates move from their now ancient record low of 1.50%, it will be upward. But such a move isn’t coming anytime soon and the language change suggests that at least some rate setters are prepared to entertain doubts. According to index provider ASX, rate futures no longer fully price even a quarter percentage point increase at any time over their 18-month forecast horizon.

But there’s really little news here. The Australian Dollar has been on the interest rate differential back foot against its big US brother for months now.

What has hit AUD/USD harder perhaps is the apparently ever-growing trade spat between the US, China and to a lesser but significant extent, Europe and Canada. With threats of US tariffs and Chinese retaliation all-but daily occurrences, the Australian Dollars links to China –once so beneficial for the bulls- have become more of a liability.

No wonder perhaps that the Aussie should have plumbed lows not seen for more than a year against the greenback.

Now, the new week will bring very little for investors in the way of Australian economic numbers, but all the same, they probably shouldn’t expect much respite from recent, relentless falls. The Reserve Bank of New Zealand will set interest rates for June on Thursday. It’s not expected to raise its own Official Cash Rate from 1.75% and is expected to strike a more dovish note. If investors need any more proof that interest rates are stuck in Australasia, they are very likely to get it.

Battered Australian Dollar bulls’ only slight hope must be that the week’s plentiful US economic data underwhelm. There are various snapshots on offer from durable goods order levels through to consumer confidence and a look at Gross Domestic Product.

However, the Fed looks committed to further tightening its own monetary policy and it’s going to take headwinds of an almost unimaginable ferocity to change its mind. Those seem unlikely this week, which is one major reason why it just has to be another bearish Australian Dollar call.

Australian Dollar's 360 Degree Hammering Likely To Continue

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

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New Zealand Dollar May Fall on US Data and Trade Wars. Not RBNZ

Classic technical analysis, macro and economic themes

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New Zealand Dollar Fundamental Forecast: Bearish

NZD Outlook Talking Points:

  • The New Zealand Dollar fell amidst trade war fears and a lower RBNZ rate outlook
  • Next week’s RBNZ could be a non-event and perhaps lack a volatile NZD reaction
  • NZD may fall as USD rises on local data while stocks are at risk to tariff escalation

Have a question about what’s in store for New Zealand Dollar next week? Join a DailyFX Trading Q&A Webinarto ask it live!

The New Zealand Dollar came under selling pressure as increased trade war tensions between the US and China sent stocks lower during the first part of last week. There, US President Donald Trump threatened the world’s second largest economy with $200b in tariffs. Then, the Kiwi Dollar resumed depreciating as the markets anticipated a flatter outlook for RBNZ rates in the long run.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

Looking to next week, NZD might have room to continue descending. The currency does face an interest rate decision from the Reserve Bank of New Zealand, but that may pass without much volatility. Since May’s monetary policy announcement, there has not been much of economic updates to perhaps materially alter their assessment. Only last week, we had an in-line local GDP report where growth clocked in at 2.7% y/y in Q1.

Back in May, RBNZ Governor Adrian Orr said that he wants to see core inflation to rise before raising rates. Given that we have not had a CPI update since then, this opens the door for the central bank to reiterate the status quo. This being that a rate cut is just as much likely as a hike next. Given how low rate hike expectations in New Zealand already are for the end of the year, there is not much room for disappointment left.

With that in mind, domestically speaking we may seem some heightened Kiwi Dollar price action on a trade balance report Tuesday. Lately, New Zealand economic data has been tending to underperform relative to economists’ expectations. But this has been by increasingly less so since the middle of May. Net exports (another word for trade balance) is a component of GDP and can thus impact economic growth down the road.

Externally speaking, a loaded US economic docket has the potential to further bolster Fed hawkish expectations. From the world’s largest economy, we will get consumer confidence, GDP and the Fed’s preferred measure of inflation (Core PCE). Unlike New Zealand, US local data has been tending to cross the wires slightly better than expectations in recent weeks. More of the same may boost USD at the expense of NZD.

Finally, do keep an eye on how trade tensions continue brewing in not just the week ahead, but thereafter. Since the US additional tariffs threat, China has prepared a list of reciprocal measures. Signs of further escalation risks dragging down global stock prices and with it, the sentiment-sensitive New Zealand Dollar. As such, the fundamental forecast for it will have to be bearish.

New Zealand Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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