US Dollar May Fall Further on Timid FOMC Meeting Minutes

Fundamental analysis, economic and market themes

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US Dollar May Fall Further on Timid FOMC Meeting Minutes

Fundamental Forecast for the US Dollar: Bearish

  • US Dollar tumbles after January’s inflation report underwhelms
  • Reach for yield set to keep capital pouring into USD alternatives
  • FOMC meeting minutes unlikely to revive greenback’s fortunes

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The US Dollar crumbled anew last week, suffering deep losses against all of its major counterparts. What started as a corrective pullback following the prior week’s forceful rebound turned into rout after January’s CPI data crossed the wires.

The inflation rate topped forecasts – sparking a brief burst of panic across financial markets – but ultimately underwhelmed. It registered unchanged from the prior month at 2.1 percent on-year, a limp result in the eyes of markets primed for fireworks after wage growth unexpectedly surged to a nine-year high.

That jump in wages stoked fears of a far more aggressive Fed rate hike cycle than markets had accounted for, sinking stock markets and putting the greenback on the offensive. When the headline price growth reading underwhelmed, those worries evaporated.

The narrative prevailing before February 2 is seemingly back at the forefront. That envisions a broadening global recovery forcing central banks to follow the Fed’s hawkish lead, narrowing the Dollar’s yield advantage and pushing capital flows toward now seemingly cheap alternatives.

Minutes from January’s FOMC meeting amount to the only significant bit of news-flow with potential to overturn trend next week. In the unlikely event that the committee sounds profoundly more hawkish, the US unit will find new vigor. More probably however, a cautious stance will lead to deeper losses.

--- Written by Ilya Spivak, Currency Strategist for

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Euro Turns to February PMIs, ECB Minutes to Keep Gains Intact

News events, market reactions, and macro trends.

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Euro Turns to February PMIs, ECB Minutes to Keep Gains Intact

Fundamental Forecast for EUR/USD: Neutral

- Preliminary February PMI figures are due from across the Euro-area in the coming days and should frame the conversation about the Euro’s fundamentals for the next few weeks.

- Given the still-outsized net-long Euro position in the futures market, traders may want to treat the bearish daily key reversal in EUR/USD on Friday with caution.

- The IG Client Sentiment Index has started to cool on EUR/USD in the near-term, although the retail crowd remains net-short.

The Euro finished in the middle of the pack last week, adding another +1.24% versus the US Dollar, even as EUR/USD marked a bearish daily key reversal on Friday. Elsewhere, with volatility remaining elevated across asset classes, EUR/JPY was the worst performer, dropping by -1.17%. Overall, the Euro hasn’t moved much over the past few weeks, with the Euro trade-weighted index finishing Friday at 127.74, barely lower than where it was at the end of January (127.83).

In the coming week, attention will initially be on the preliminary February Euro-Zone PMI readings on Wednesday, and the figures should help shape the market’s perception of the region’s growth prospects. Consensus forecasts, according to Bloomberg News, see the first reading for the Manufacturing PMI to come in at 59.2 from 59.6, an immaterial drop from all-time highs.

Likewise, the Composite PMI for the Euro-Zone is due in at 58.4 from 58.8, another insignificant drop even as the headline drops from its highest level since February 2011. There will need to be a considerably large drop in the PMIs for traders to reconsider their optimism over the Euro’s prospects.

On Thursday, the minutes from the European Central Bank’s January meeting are due. However, unlike the January release, which covered the December meeting which had a new set of Staff Economic Projections revealed, the coming minutes will have much less ‘hard’ information to discuss. Barring an explicit discussion condemning the trade-weighted Euro’s appreciation in recent months, there is limited prospect for the minutes to leave a mark.

Elsewhere, market measures of inflation continue to hold up, with the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of inflation, closing on Friday at 1.750%, the same as the week prior. The Euro itself may be an impediment to higher inflation expectations, given that the trade-weighted index is up by +9.24% y/y.

Moving forward, traders will need to remain cautious about the overextended state of the futures market, where speculators are still holding a significantly large net-long Euro position. For the week ended February 13, speculators held +127.3K net-long contracts; not an insignificant drop from the all-time high in net-longs set during the week ending on January 30 at +148.7K contracts.

Even in the face of a -14.4% drop in net-longs over the past two weeks, EUR/USD was still able to push to new highs going back to December 2014. Needless to say, it will take a great deal of negativity – a change in tone by the ECB, a substantial turn in economic data – for traders to give up on their Euro bullishness.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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Yen Surges to 15-Month Highs: Japanese Inflation as a Pivotal Driver

Price action and Macro.

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Yen Surges to 15-Month Highs: Japanese Inflation as a Pivotal Driver

Fundamental Forecast for JPY: Bullish

Talking Points:

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The Japanese Yen put in a pronounced move of strength this week as the currency crafted a fresh 15-month high against the US Dollar. Price action in USD/JPY drove-lower Monday thru Thursday, finally running into a bit of technical support on Friday morning. This bearish move broke through the support-side of a range that’s been in-place for more than nine months; and making matters more interesting is the fact that of these fireworks happened with a backdrop of seemingly ‘good’ news.

BoJ Governor Haruhiko Kuroda was re-appointed for a second five-year term atop the bank. While this was largely expected throughout the week, the formal announcement on Friday morning comes-in around the same time as that support bounce; but given dynamics across the FX market, it would appear as though the Friday pullback is more related to an oversold US Dollar seeing a bit of short-cover ahead of a long holiday weekend in the United States.

USD/JPY Weekly Chart: Plunge to Wedge, Trend-Line Support

Yen Surges to 15-Month Highs: Japanese Inflation as a Pivotal Driver

Chart prepared by James Stanley

Governor Kuroda was the architect of the Bank of Japan’s massive stimulus program, coming into play with the election of PM Shinzo Abe in Q4, 2012. Since then, the Japanese economy has added a significant amount of liquidity as the search for 2% inflation continues. With Japan continuing to see inflation levels below one-percent, and even below .5% for the first half of last year - this kept the Yen as a favored currency for strategies of weakness, allowing for outsized bullish moves to develop in pairs like EUR/JPY and GBP/JPY.

More recently, that weakness has started to come into question as investors around the world speculate when the BoJ might actually begin to move away from those uber-dovish policy metrics. At this point, the BoJ has shown no signs of budging, but that hasn’t kept markets from staging a pattern of Yen-strength as inflation has started to creep-higher last month. Inflation came-in at an annualized one-percent in December. This is a 33-month high, and since we’ve had that print, matters of Yen-weakness haven’t really been the same.

Japanese CPI Sets 33-Month High in December: January Inflation Released on Friday

Yen Surges to 15-Month Highs: Japanese Inflation as a Pivotal Driver

Chart prepared by James Stanley

In response to this Yen strength, Japanese Finance Minister, Taro Aso, was directly asked whether or not the Finance Ministry might intervene to stem the flow. He deferred, saying that the gains in the currency weren’t yet enough to begin plotting intervention. In the wake of that announcement, the currency strengthened even more, and this keeps a rather bullish appeal to the Yen as we approach a vitally-important data print next Friday (Thursday at 6:30 PM ET in New York, 11:30 PM in London).

Next Friday will see the release of January inflation numbers out of Japan, and this will likely help to drive Yen-flows in the coming weeks. The next major driver after next week’s inflation print is the Bank of Japan rate decision on March 8-9, and that’s when we can hear how the bank might be looking to manage their QE strategy in the backdrop of rising inflation. But, if next week’s inflation comes out at an annualized one-percent or more, expect a continuation of strength in the Japanese Yen much as we’ve seen since the release of December inflation numbers.

The forecast for next week on the Japanese Yen will be set to bullish.

To read more:

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

--- Written by James Stanley, Strategist for

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GBP: A Self-Imposed Spell On The Sidelines

Fundamental analysis and financial markets.

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GBP: A Self-Imposed Spell On The Sidelines

Talking Points:

  • GBP remains stuck in a ruck against the EUR with a breakout unlikely in the short-term.
  • GBP/USD is moving on the changing fortunes of the US dollar
  • Heavyweight UK data nears and there’s no reason to get in its way.

Fundamental Forecast for GBP: Neutral

We changed our previously bullish outlook on GBP to neutral last week, citing ongoing Brexit concerns, and we remain on the sidelines this week with little to spark a bullish or bearish conviction.

Brexit talks took a slightly more considered approach late this week when the EU said that they would a ‘punishment clause’ from their Brexit rules and regulations, due to vocal opposition from both the UK and various EU members who thought the measures overly punitive. Whether the clause should have been inserted in the first place is a moot point. As we write, UK PM May is readying herself to speak with German Chancellor Angela Merkel and the outcome of this discussion could give some hints to EU talks in the month ahead of the European Council summit on March 22-23. Despite ongoing difficulties in trying to form a ruling party in Germany, Chancellor Merkel’s opinion is highly valued within the EU and as such should be monitored closely by sterling traders.

On the UK data docket next week, December employment and wages data on Wednesday could provoke a reaction in GBP while on Thursday Q4 GDP numbers will be released. This is the second look at the UK fourth-quarter growth figures. The second quarter estimate of GDP is based on additional data and is produced later than the first estimate and provides a more precise indication of economic growth.

Sterling remains range bound against the Euro and is unable to break out of the 0.86900 – 0.90300 range that has held firm since mid-September 2017, while against the US dollar sterling has shown slightly more volatility with a tendency to push to the upside. A lot of the movement in GBPUSD has been UD dollar driven and until the higher US yields/lower US dollar conundrum has been fully explained, we advise a wait-and-see approach in the week ahead.

GBP/USD Price Chart Daily Timeframe (September 2017 – February 16, 2018)

GBP: A Self-Imposed Spell On The Sidelines

Gold Prices Bounces Back on Strong CPI but Preserve January Range

Short term trading and intraday technical levels

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Gold Prices Bounces Back on Strong CPI but Preserve January Range

Fundamental Forecast for Gold:Neutral

Gold prices are on pace for the largest weekly advance since August and snaps a two-week losing streak with the precious metal rallying more 2.8% to trade at 1353 ahead of the New York close on Friday. The gains comes alongside a continued rebound in equity markets with all three major U.S. indices trading higher by more than 4% on the week.

A strong print on the U.S. January Consumer Price Index (CPI) on Wednesday saw gold prices rally to fresh weekly highs with the advance paring all of the early-February losses. The recent uptick in the inflation outlook has fueled expectations that the Federal Reserve may have to hasten the pace / scope of future rate hikes with Fed Fund Futures now pricing an 83% likelihood for a hike in March. Still, yields have struggled, trading well-off fresh yearly highs late in the week.

Last week we postulated that, “Gold is caught in a tug-of-war from a fundamental standpoint. An increase in inflation expectations would typically be supportive but the focus on how this may impact the path for monetary policy continues to outweigh sentiment.” Despite this week’s strong CPI release, price action was a clear indicator that sentiment may have shifted with the U.S. Dollar coming under considerable pressure as traders piled into gold.

That said, the inflationary outlook may reignite demand for the precious metal as a store of wealth and a hedge against capital delusion. Underlying this backdrop are a continued rise in U.S. Treasury yields with the 10-year note testing multi-decade resistance. From a technical standpoint however, gold has carved out a well-defined yearly opening range within the broader uptrend with prices trading just below the range highs into the close of the week.

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Gold Prices Bounces Back on Strong CPI but Preserve January RangeGold Prices Bounces Back on Strong CPI but Preserve January Range

Gold Prices Bounces Back on Strong CPI but Preserve January Range
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +1.64 (62.1% of traders are long)- bearish reading
  • Long positions are 0.6% higher than yesterday and 2.2% lower from last week
  • Short positions are 0.1% higher than yesterday and 2.3% higher 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. However, retail is more net-long than yesterday but less net-long from last week and the combination of current positioning and recent changes gives us a further mixed Spot Gold trading bias from a sentiment standpoint.

See how shifts in Gold retail positioning are impacting trend- Read more about how to impliment Sentiment in your trading!

Gold Weekly Price Chart

Gold Prices Bounces Back on Strong CPI but Preserve January Range

Gold prices turned just ahead of highlighted support noted last week at 1295-1302 with the rally failing just ahead of the January high / 2016 high-day close at 1366. Critical resistance remains up at 1380/92 where the 2014 high and 38.2% retracement converge on the median-line of the 2013 broader pitchfork formation (blue).

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Gold Daily

Gold Prices Bounces Back on Strong CPI but Preserve January Range

Gold Prices Bounces Back on Strong CPI but Preserve January Range

This week’s rally takes the bullion prices through the February open / opening-range highs and while this would be regarded as a bullish signal, price continues to hold within the broader January range with slope resistance further highlighting the 1366 threshold. Interim support is eyed back at the 50-line (currently ~1340s) with bullish invalidation now raised to the February low-day close at 1318. Note that weekly momentum looks a bit tired here and suggests the immediate advance may be vulnerable into the extended holiday weekend.

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Gold 240min

Gold Prices Bounces Back on Strong CPI but Preserve January Range

A closer look at gold sees prices turning just ahead of slope resistance on building momentum divergence (note the pending support trigger). Look for interim support targets at 1340 on this pullback with near-term bullish invalidation at the highlighted confluence at 1336.

Bottom line: Expect some pullback early in the week and IF this rally has legs, declines should be limited to basic trendline support extending off the late January low. A breach above 1366 targets subsequent resistance objectives at 1378/79.

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

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Central bank policy, economic indicators, and market events.

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD trades near the monthly-high (1.2902) as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2018, but a marked pickup in Canada’s Consumer Price Index (CPI) may rattle the near-term resilience in the exchange rate as it puts pressure on the Bank of Canada (BoC) to follow a similar path to its U.S. counterpart.

Fresh forecasts from Fed officials suggest the central bank will stay on its current course of delivering three rate-hikes per year, and the hiking-cycle may prop up USD/CAD over the near-term especially as the BoC endorses a wait-and-see approach for monetary policy.

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

With Fed Fund Futures showing budding expectations for a March rate-hike, the pair stands at risk for a more meaningful recovery going into the end of 2017, but key data prints coming out of Canada may spark a bearish reaction in the dollar-loonie exchange rate as the headline reading for inflation is expected to climb to an annualized 2.0% from 1.4% in October.

The threat for above-target inflation may heighten the appeal of the Canadian dollar its raises the risk of seeing Governor Stephen Poloz and Co. adopt a more hawkish tone in 2018, and the central bank may increase its efforts to prepare Canadian households and businesses for higher borrowing-costs as officials note ‘higher interest rates will likely be required over time.’ On the other hand, a below-forecast CPI print may fuel the near-term resilience in USD/CAD as it raises the BoC’s scope to retain the current policy for the foreseeable future. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/CAD Daily Chart

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Near-term outlook for USD/CAD remains clouded with mixed signals as the pair marks a failed attempt to test the monthly-high (1.2902), with the pair stuck in a narrow range as the 1.2620 (50% retracement) region offers support. Keep in mind, the Relative Strength Index (RSI) highlights a similar dynamic as it struggles to push back into overbought territory, but the broader outlook remains supportive as the oscillator preserves the bullish formation carried over from August.

With that said, topside targets remain on the radar for USD/CAD, with a break of the near-term range raising the risk for a move back towards the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region. Want to learn more about popular trading indicators and tools such as the RSI? Download and review the FREE DailyFX Advanced Trading Guides!

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Australian Dollar Vulnerable to Risk Trends and External Factors

Australian Dollar Vulnerable to Risk Trends and External Factors

Australian Dollar Fundamental Forecast: Neutral

Talking Points:

  • Australian Dollar appreciated this week as Wall Street recovered and volatility cooled
  • RBA’s Governor Philip Lowe reinforced that the central bank is in no rush to raise rates
  • Risk appetite and external factors seem to be what could drive Aussie Dollar next week

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After two weeks of heavy selling pressure amidst market-wide risk aversion, the sentiment-linked Australian Dollar launched a recovery against its US counterpart. Its appreciation was accompanied by a recovery on Wall Street and other stock exchanges as volatility cooled. The CBOE’s VIX, which came under manipulation allegations, fell below 20 on February 14th.

A slightly disappointing local jobs report failed to hinder the Aussie Dollar’s advance. There, Australia experienced an overall net gain in employment. In fact, the outcome even beat expectations. However, traders cared more about the contraction in the full time sector, which was the worst since September 2016. That was also accompanied with a decline in the labor force participation rate.

The following day RBA Governor Philip Lowe testified to the House of Representatives. He noted that the next rate move will likely be up and that “less monetary stimulus is appropriate at some point”. However, a key takeaway from the speech was that he didn’t “see a strong case for a near-term policy adjustment”. This also brings us to what might be in store for the Australian Dollar going forward.

Australia’s economic calendar is lacking critical event risk in the week ahead. Yes, we do have the minutes of RBA’s February monetary policy statement and then the wage price index release. The former will probably echo the central bank’s reluctance to commit to changing rates for now. The latter could be a wildcard if strong wage growth inspires another bout of inflation fears (though the recent better-than-expected US CPI report failed to do so).

Given a static RBA outlook, the Australian Dollar will probably be most vulnerable to risk appetite and external factors in the coming week. We do have the FOMC meetings minutes coming up, but the details of the release will be tied to a rather uneventful monetary policy decision. With that in mind, the outlook will be neutral as the Aussie seems likely to continue tracking stock markets.

New Zealand Dollar Braces for Risk Trends and US CPI

New Zealand Dollar Braces for Risk Trends and US CPI

New Zealand Dollar Fundamental Forecast: Bearish

Talking Points:

  • New Zealand Dollar declined as the S&P 500 fell, RBNZ cooled rate hike expectations
  • The Fed is on path to overtake RBNZ on rates, diminishing Kiwi Dollar’s yield appeal
  • Heightened inflation fears will have the markets anxiously or eagerly awaiting US CPI

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The sentiment-sensitive New Zealand Dollar came under fire last week as inflation fears triggered aggressive risk aversion in the markets. The 10-year and 30-year US government bond auctions saw less demand, with bid-to-cover ratios falling and yields rose. By Thursday, the S&P 500 corrected lower more than 10 percent from the January 26th high.

Earlier in the week, an impressivelocal employment report initially boosted the currency. In fact, the unemployment rate ticked down to its lowest since the 2007-08 Global Financial Crisis. However, continued volatility in stock markets as well as the RBNZ rate decision soon spoiled the Kiwi’s fun.

The Reserve Bank of New Zealand left rates unchanged and cooled hawkish policy expectations. Overnight index swaps were pricing in a 62.2% chance of a 25 basis point uptick by the end of the year prior to the event. Expectations dropped to 53.5% the day after. Moreover, it became clear that the Fed is likely to overtake the RBNZ in terms of where rates are going in the near-term.

This spells disaster for the New Zealand Dollar’s yield advantage over the US Dollar and brings us to what next week has in store for the markets. On Wednesday, we will get the United States CPI report for the same month as the better-than-expected NFPs outcome. Economists are predicting the headline inflation rate to fall to 1.9% y/y from 2.1%.

However, data out of the country has increasingly outperformed relative to estimates as of late. If this holds true for the US CPI release, it might further firm Fed rate hike expectations. This might in turn lessen the appeal of the New Zealand Dollar, which currently boasts the highest yield in the FX majors spectrum, and make its US counterpart more attractive.

In fact, commentary from the Reserve Bank of New Zealand seemed to align with this argument. Assistant Governor John McDermott pointed out on Thursday that he expects Kiwi Dollar to ease as the Fed raises rates. Meanwhile, Governor Grant Spencer revealed that he was surprised with their low inflation outcome.

A lack of key economic event risk out of New Zealand next week will probably leave Kiwi traders anxiously or eagerly awaiting the US inflation report. With that in mind, the outlook for the New Zealand Dollar will be bearish as it could still be vulnerable to risk trends and diminishing yield appeal.