Forecasts

US Dollar Rebound May Continue on CPI, European Politics

Fundamental analysis, economic and market themes.

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DXY

US DOLLAR FUNDAMENTAL FORECAST: BULLISH

  • US midterm elections outcome, FOMC rate decision drive Dollar upward
  • Upbeat inflation data may boost Fed rate hike bets, adding to USD gains
  • Sluggish Brexit talks, jitters in Italy and Sweden may stoke haven demand

See our US Dollar forecast to learn what will drive prices through the end of the year!

US midterm elections delivered as expected last week, producing a divided Congress as the Democrats reclaimed control of the House of Representatives and sending the Dollar higher. While the currency initially wobbled, hopes for a bipartisan infrastructure spending effort that boosts growth and inflation – pushing the Fed into a steeper tightening cycle – ultimately translated into a reversal higher.

The policy announcement from the Federal Reserve was also helpful. The rate-setting FOMC committee was unusually brief in its pronouncement, conspicuously overlooking October’s market turmoil and accenting attention on the economy’s strength. That amplified tailwinds propelling the Greenback higher as markets concluded that Jerome Powell and company will not be easily persuaded to dial back tightening.

October’s US CPI report headlines the economic data docket in the week ahead. The headline on-year inflation rate is expected to rebound to 2.5 percent after sliding to a seven-month low of 2.3 percent in the prior month. US economic news-flow has increasingly improved relative to consensus forecasts recently, opening the door for an upside surprise that inspires another upshift in the projected Fed rate hike path.

Meanwhile on the external front, European politics are in focus. Brexit-related news flow will dominate at the beginning of the week. UK Prime Minister Theresa May is holding a cabinet meeting to persuade ministers to back her plans while chief EU negotiator Michel Barnier is due to brief regional officials and the press on how talks are progressing.

From there, Italy will resubmit its budget to the EU Commission. It has taken issue with Rome’s deficit projections – saying they will violate statutory limits – but the anti-establishment government now ruling the bloc’s third-largest economy has refused to make changes. Sweden will then attempt to break gridlock following an inconclusive general election by electing a Prime Minister and adopting a “neutral” budget.

If Brexit talks continue to stall while the EU is roiled by worries about swelling euroscepticism – primarily in Italy but also in Sweden – market-wide risk appetite may sour. Haven demand for the US Dollar may re-emerge in this scenario, compounding gains the currency might enjoy courtesy of domestic data. Confident comments From Fed officials including Chair Powell throughout the week may likewise help.

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

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

OTHER FUNDAMENTAL FORECASTS:

Australian Dollar Forecast – Australian Dollar Can Hold Up As Long As Risk Appetite Does Too

Oil Forecast – Crude Oil Prices May Extend Fall as Fed Boosts USD, Sinks S&P 500

Oil Forecast – Oil Price Enters Bear Market Even as U.S. Crude Output Hits Record-High

British Pound Forecast – Brexit Breakthrough Needed for Bullish Breakout



Euro Forecast: GDP and CPI Revisions Due amid Ongoing Italian Tensions

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Euro Forecast: GDP and CPI Revisions Due amid Ongoing Italian Tensions

Fundamental Forecast for EUR/USD: Bearish

- Continued tension around Italy’s budget keeps the tone around the Euro bearish, as neither Brussels nor Rome appears ready to compromise on their respective demands.

- Incoming economic reports aren’t likely to be helpful for the Euro, as revisions to already-released data will remind market participants about slowing growth momentum in the Eurozone.

- The IG Client Sentiment Indexcontinues to suggest more downside ahead for the Euro.

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

The Euro continued its streak of underperformance last week, losing ground against five of the seven major currencies, while extending its weekly loss streak against the US Dollar to four in a row (and six of the last seven; EUR/USD lost -0.46% last week). EUR/NZD and EUR/AUD continued to lead the way lower alongside widespread gains by risk-correlated assets, dropping by -1.66% and -0.92%, respectively. To this end, ongoing strength in equity markets allowed EUR/JPY to stay afloat by a meager +0.10%.

As the calendar now turns into the middle of November, it seems likely that the catalysts that have guided the Euro lower in recent weeks will remain in place. Concerns about flailing growth momentum won’t be shaken off, as the second revision to the Q3’18 Eurozone GDP report will remind market participants about weakness on the economic data front. The Citi Economic Surprise Index for the Eurozone is currently at -55.8, down from -24.8 one month ago.

Similarly, the final release of the October Eurozone CPI report will show that price pressures in the region remain below the European Central Bank’s medium-term target of +2%, set to stay on hold at +1.7% y/y as first reported. Inflation expectations have risen in recent weeks, up to 1.706% on November 9 from 1.686% on October 12. The weaker Euro in recent weeks may be helping lift inflation expectations; on a year-over-year basis, the trade-weighted Euro is down by -1.49%.

Otherwise, the simmering Italian debt saga will continue to be a main draw for market participants. For Italian politicians in Rome, there is a desire to run a budget that fulfills key campaign promises, which will lead to increased deficit spending in the near-term. For European policymakers in Brussels, the concern is that large deficits will raise the odds of a larger-scale Greece-style crisis (Italy’s debt-to-GDP ratio is 130%) for the Eurozone’s third-largest economy. A compromise isn’t out of the question, but is looking markedly less likely than where things stood at the end of September.

Finally, looking at positioning, according to the CFTC’s COT for the week ended November 6, speculators increased their net-short Euro positions to 46.8K contracts, an increase from the 32.6K net-short contracts held in the week prior. Positioning is starting to become interesting once again, but is still remains on the historically light side and thus the risk of capitulation remains low.

FX TRADING RESOURCES

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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.



Yen Price May Rise, Look Past BoJ, Eye Vulnerable Stock Markets

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Japanese Yen Fundamental Forecast: Bullish

  • Anti-risk Japanese Yen appreciated as S&P 500 and global stocks sold off
  • JPY may look past status quo BoJ and continue to focus on risk trends next
  • Next week offers plenty of distractions, but more Yen gains may be in store

Trade all the major global economic data live and interactive at the DailyFX Webinars. We’d love to have you along.

In a week filled with prolonged adverse stock market volatility, the anti-risk Japanese Yen appreciated against most of its major counterparts. The funding currency often benefits when sentiment turns sour and the importance of preserving capital leads to an unwinding of carry trade exposure. This results traders buying back funding currencies, of which the Yen is a prominent one and it appreciates.

The chart below shows a Japanese Yen basket (composed of an average of USD/JPY, AUD/JPY, GBP/JPY and EUR/JPY) compared to the performance in the S&P 500. I have also overlaid a US Dollar basket, showing the greenback appreciating as well. It often benefits amidst market-wide risk aversion as the world’s reserve currency, rising with US Treasury prices.

JPY Versus USD Basket and S&P 500

Yen Price May Rise, Look Past BoJ, Eye Vulnerable Stock Markets

Chart created in TradingView

When looking at USD/JPY specifically, we saw the pair edge cautiously lower as Wall Street essentially wiped out the progress it made this year thus far. Both currencies get a boost from souring market mood, but it seems as though the prominence of carry trade just narrowly surpasses the appeal of the US Dollar in times of financial market stress.

With that in mind, we turn our attention to the week ahead. The previous one was notably lacking in prominent economic data, allowing for markets to focus on the bigger fundamental picture which looks shaky for risk trends. Those are still vulnerable to tightening global credit conditions, trade wars, emerging markets and political uncertainty.

This week changes up the pace beginning with key domestic event risk. The Japanese Yen will be eyeing October’s BoJ monetary policy announcement which as per usual, is released at an unspecified time on Wednesday. Rates and the 10-year government bond yield target are anticipated to remain unchanged as Japanese inflation rates remain well short of the central bank’s sustainable 2 percent target.

Yen Price May Rise, Look Past BoJ, Eye Vulnerable Stock Markets

Unless we get a dramatic shift in forward guidance, which seems unlikely, this may result in another status quo event. What would be interesting to watch is how BoJ’s Governor Haruhiko Kuroda addresses the growing external pressures such as trade wars or even resource nationalism.

Meanwhile global stocks have temporary distractions to perhaps look forward to ranging from the Fed’s preferred measure of inflation, Italian GDP, Brazilian elections, US consumer confidence with unemployment data due later on and much more. Better-than-expected data out of the United States can continue bolstering Fed rate hikes, which could give the S&P 500 more fuel to its descent.

But last week exposed stocks to a lull in data, allowing the aforementioned bigger fundamental themes to drive them lower. Even with this week’s distractions, the background is still a threat to equities and it may ultimately drive them to new lows once prominent event risk passes. As such, this could continue driving the Japanese Yen higher and the fundamental outlook will have to be bullish.

Japanese Yen Trading Resources

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

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



GBP Forecast: Brexit Breakthrough Needed for Bullish Breakout

Fundamental analysis, news events, market reactions and macro trends.

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GBPUSD

Fundamental Forecast for GBP: Neutral

GBPUSD Analysis and Talking Points:

  • GBP Bulls Await Brexit Breakthrough
  • Plethora of UK Data Likely to Take a Backseat

See our Q4 GBP forecast to learn what will drive the GBP through the quarter.

GBP Bulls Await Brexit Breakthrough

It will be another critical week for UK politics as Brexit negotiations persist with UK markets hoping for a breakthrough. Rumours have continued to drive price action in the Pound, many of which have been conflicting and thus seen GBP trade in choppy fashion. While there has seemingly been progress made, the key issue continues to centre around the Irish border, which has yet to have a workable solution. However, there is rising hope that a deal could be announced soon as implied by option traders with 1-month risk reversals showing a decline in premium for GBP puts (downside protection).

Plethora of UK Data Likely to Take a Backseat

On Friday, the ONS showed UK growth for Q3 rose at its fastest pace since Q4 2016 at 0.6%, which was also in line with the Bank of England’s forecast. However, this does not tell the whole story, as business investment dropped for a third consecutive quarter for the first time since the financial crisis, while indications for Q4 GDP suggest a slowdown.

Looking ahead to this week, the UK labour market report may garner attention, particularly after the BoE QIR in which the central bank upgraded their 2018 view on wages as inflation pressures begin to build in response to the tight labour market. On Wednesday, inflation figures are expected to tick up slightly with analysts calling for headline inflation at 2.5%, while UK data will be rounded off on Thursday with retail sales.

Next week’s Economic Calendar

GBP Forecast: Brexit Breakthrough Needed for Bullish Breakout

Source: DailyFX

GBPUSD Price Chart: Daily Timeframe (Feb – Nov 2018)

GBP Forecast: Brexit Breakthrough Needed for Bullish Breakout

Chart by IG

Momentum continues to slow as optimism is persistently faded, which in turn has seen GBP back below the 1.30 handle. Support is situated at 1.2950 before the 1.29 handle, which could be tested amid large speculative short positioning. Concrete progress in Brexit negotiations are needed in order to spark a firm bid in the currency. If not, continued uncertainty could continue to pressure the Pound.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Australian Dollar Can Hold Up As Long As Risk Appetite Does Too

Oil Forecast – Crude Oil Prices May Extend Fall as Fed Boosts USD, Sinks S&P 500

Oil Forecast – Oil Price Enters Bear Market Even as U.S. Crude Output Hits Record-High



Gold Forecast: Mid-Term Election May Provide Catalyst for Topside Breakout

Fundamental analysis, news events, market reactions and macro trends.

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Gold

Fundamental Forecast for Gold: Neutral

Gold Price Analysis and Talking Points:

  • A choppy week saw gold prices close the week flat
  • US Mid-Term Elections and Federal Reserve on the Agenda

See our quarterly gold forecast to learn what will drive prices through mid-year!

DailyFX Mid-Term Election Preview

Gold prices saw a relatively choppy week with the precious metal hitting lows of $1211 before retracing back towards $1230, which in turn saw the precious metal close flat for the week. Much of the bounce back in gold had been led by the gains seen in the Chinese Yuan, which has become increasingly influential on the price action seen in the precious metal. As such, with gold in Chinese terms consolidating at its elevated levels and thus lacking signs of an imminent breakout. The view for the upcoming for Gold is neutral.

US Mid-Term Elections and Federal Reserve on the Agenda

As we look ahead for the upcoming week, much of the focus will be placed on the US political front with the mid-term elections. Given recent polling data and historical performance, there is an increased risk that President Trump and Republican party could lose the Lower House in Congress to the Democratic party, which could in effect lead to a political gridlock in Washington. This could see the USD slip and equity markets slips with Trump potentially facing increased hurdles to pass through his domestic agenda and thus the initial reaction to this outcome could be a bid in Gold prices.

However, gold prices could be tempered by the upcoming Federal Reserve monetary policy. While it is not expected that the Fed will raise rates (Expected to hike rates in December). The Federal Reserve could continue to signal an upbeat assessment on the US economy, advocating the case for further rates hikes, consequently weighing on the precious metal.

Next week’s Economic Calendar

ECONOMIC CALENDAR

GOLD PRICE CHART: Daily Time-Frame (July 2018-August 2018)

GOLD DAILY CHART

Chart by IG

$1240 remains the stumbling block for gold bulls with prices failing to make a firm break above this level. A close above could open up room towards the July 9th swing high ($1265). On the downside, a cluster of DMAs (50 and 100) coinciding with the 23.6% Fibonacci Retracement (drop from $1365 to $1160) offers firm support for prices.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

Other Weekly Fundamental Forecast:

New Zealand Dollar Forecast - RBNZ May Sink NZD Prices as 2018 US Midterms Offer it Uncertainty

Australian Dollar Forecast – Australian Dollar Shows Some Rare Resilience, May Hold Up

Oil Forecast – Crude Oil Sell Off Puts Former Best Asset Within Whisper of Bear Market

Canadian Dollar Forecast – USD/CAD Rate Carves Lower Highs & Lows Ahead of Fed Meeting

British Pound Forecast – Sterling's Rally May Have More Room, All Things Being Equal

US Dollar Forecast – US Dollar Likely to Rise as the Midterm Elections Outcome Emerges



USD/CAD Rate Carves Lower Highs & Lows Ahead of Fed Meeting

Central bank policy, economic indicators, and market events.

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USDCAD

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD bounces back from the weekly-low (1.3049) as the above-forecast print for U.S. Non-Farm Payrolls (NFP) overshadows the 11.2K expansion in Canada Employment, but price action ahead of the Federal Reserve meeting raises the risk for a larger pullback in the exchange rate as it carves a fresh series of lower highs & lows.

The Federal Open Market Committee (FOMC) interest rate decision on November 8 may influence the near-term outlook for USD/CAD even though the central bank is widely expected to retain the current policy as Fed Fund Futures continue to reflect expectations for a rate-hike in December.

USD/CAD Rate Carves Lower Highs & Lows Ahead of Fed Meeting

It seems as though the FOMC is sticking to the Summary of Economic Projections (SEP) as the central bank appears to be on course to raise the benchmark interest rate to a fresh range of 2.25% to 2.50% ahead of 2019, and Chairman Jerome Powell & Co. may continue to strike a hawkish forward-guidance for monetary policy as the economy sits at full-employment, while inflation climbs above the 2% target.

Moreover, a growing number of Fed officials may show a greater willingness to extend the hiking-cycle as ‘several participants reported that firms in their Districts that were facing higher input prices because of tariffs perceived that they had an increased ability to raise the prices of their products,’ and the ongoing shift in U.S. trade policy may push Chairman Powell & Co. to ‘temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee's 2 percent inflation objective or the risk posed by significant financial imbalances.’

With that said, signs of an imminent rate-hike paired with indicators for above-neutral interest rates may keep USD/CAD afloat over the coming days, with the recent advance in the exchange rate fostering a more constructive outlook as both price and the Relative Strength Index (RSI) appear to be breaking out of the bearish formations from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss key themes & potential trade setups.

USD/CAD Daily Chart

USD/CAD Rate Carves Lower Highs & Lows Ahead of Fed Meeting

The advance from the October-low (1.2782) may ultimately mark a change in USD/CAD behavior as it clears channel resistance, but the lack of momentum to test the September-high (1.3226) may generate a larger pullback as the exchange rate initiates a fresh series of lower highs & lows. In turn, the October range is on the radar, with a move below the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region raising the risk for a decline towards 1.2830 (38.2% retracement).

Other Weekly Fundamental Forecast:

New Zealand Dollar Forecast - RBNZ May Sink NZD Prices as 2018 US Midterms Offer it Uncertainty

Australian Dollar Forecast – Australian Dollar Shows Some Rare Resilience, May Hold Up

Oil Forecast – Crude Oil Sell Off Puts Former Best Asset Within Whisper of Bear Market



Australian Dollar Can Hold Up As Long As Risk Appetite Does Too

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AUD/USD

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar markets seems back to the thesis that the next interest rate move, when it comes, will be a rise
  • Of course it probably won’t come soon, and futures markets reflect this
  • But the currency has at margin a little more support here than it did

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar has completely lacked interest-rate support against its big US brother for most of this year.

The US Federal Reserve has raised interest rates three times and is expected to do so again in December. Meanwhile the Reserve Bank of Australia has left its own key Official Cash Rate alone at the post-crisis low of 1.5% for 27 months. That is record stasis by modern Australian standards. To make matters worse for Aussie Dollar bulls, local rate futures markets do not fully price in a rise here until early in 2020.

However, for all this the Australian Dollar has edged higher in the last ten trading days or so. What is going on here?

Well, part of the Aussie’s vigor may just be down to the paring of extreme short positions against it. Numbers from the Commodity Futures Trading Commission earlier this month showed such bets at three-year highs. For all Australian inflation’s stubborn weakness (and it’s this above all which drives prognoses of monetary torpor), this was an outsize wager against the currency of a Triple-A-rated economy still growing strongly and creating jobs at a remarkable clip. Some readjustment was surely in order.

However, the Australian Dollar’s interest-rate support prospects have picked up a little too. But just a little. The RBA said last week that its outlook for both inflation and employment meant that higher rates were likely ‘at some point.’

Moreover, according to Australian index provider ASX, futures markets do almost fully price a single, 25 basis point increase in the OCR by April 2020. Now, let us not overegg this. A tiny rate rive nearly two years distant will not make for overwhelming Australian Dollar support, not in the face of a Fed already much further down the same road.

But it does suggest that markets feel the RBA may yet raise rates this cycle- a boat they once thought it in danger of missing. Events may intervene of course, and a global downturn between now and early 2020 doesn’t look impossible. One of those may well see even this modest rate-rise forecast pared back.

Shorter-term the currency remains hostage to overall risk appetite, and that can change with one off-beat Tweet on trade policy from the White House. I

But, while Australian Dollar still hasn’t got much monetary policy support against the greenback, it has a little more than it did. On that basis it’s another neutral call this week.

Australian Dollar Can Hold Up As Long As Risk Appetite Does Too

--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

Other Weekly Fundamental Forecast:



RBNZ May Sink NZD Prices as 2018 US Midterms Offer it Uncertainty

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NZD/USD

New Zealand Dollar Fundamental Forecast: Neutral

  • Reduction in US China trade war concerns resulted in aggressive New Zealand Dollar gains
  • RBNZ may disappoint monetary policy bets on third quarter CPI data, sending NZD falling
  • US midterms, with Fed rate hikes still in sight, offer level of uncertainty for sentiment and NZD

We just released our 4Q forecast for equities, which may impact NZD, in the DailyFX Trading Guides page

The pro-risk New Zealand Dollar was on pace last week to mark its best performance against the US Dollar in almost two months. After a shaky October for global stock markets, November began on an upbeat as the S&P 500 set itself up for the most upside progress over the course of one week since March. The backdrop for this optimism seemed to be a cooldown in US China trade war concerns which was further bolstered Friday.

This coming week holds a level of uncertainty for NZD prices given multiple critical event risks. Starting with domestic concerns, the New Zealand Dollar awaits both a jobs report and an RBNZ rate decision. The former is due to cross the wires first and may even surprise to the upside. Such has been the case for New Zealand economic data as of late, suggesting economists are underpricing the health and vigor of the economy.

However, overnight index swaps are not pricing in one rate hike from the RBNZ in 2019, suggesting that New Zealand’s jobs report may have limited implications for NZD. Such was also the same scenario for third quarter CPI data which crossed the wires better-than-expected, reducing what was dovish monetary policy bets at the time. That led to a dramatic appreciation in the Kiwi Dollar however, and it may repeat itself.

Since then, the central bank has been relatively quiet and has given no clear signs that the stronger third quarter inflation report might tilt their forward guidance into favoring a rate hike. At the moment, policymakers have left the door open to a cut. Should the status quo remain the case, we may see a selloff in the New Zealand Dollar as bets on the CPI data (and possibly jobs too) unwind and vice versa.

For broader risk trends, the question remains whether or not market mood can continue improving as the Fed is on pace to keep raising interest rates. In the bigger picture, that seems fanciful. But for now sentiment, and thus the New Zealand Dollar, await the outcome of the US 2018 midterms. Polls are anticipating for Democrats to gain control of the House of Representatives while Republicans maintain a narrow majority in the Senate.

As such, the markets are probably pricing that in and an outcome in line with expectations may not do much to surprise traders. Thus the unexpected outcome would be Republicans holding both houses or Democrats gaining control of them. The former allows for US President Donald Trump to pursue his trade agenda without much interruption and vice versa. Given these uncertainties, the NZD outlook will have to be neutral.

Just getting started trading currencies? See our beginners’ guide for FX traders to learn how you can apply this in your strategy!

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

To contact Daniel, use the comments section below or @ddubrovskyFXonTwitter



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