US Dollar May Rise as Fed Rate Hike Outlook Tops Market Baseline

Fundamental analysis, economic and market themes

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US Dollar May Rise as Fed Rate Hike Outlook Tops Market Baseline

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar breaks month-long down trend as Fed outlook brightens
  • Further gains may be ahead as FOMC forecast tops market baseline
  • Political news-flow still important on tax cut plan, Mueller actions

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Last week marked a return to the offensive for the US Dollar. The currency even managed to break out of a month-long downtrend against an average of its major counterparts. A shift in the priced-in Fed rate hike outlook brought the timeline forward for a more front-loaded tightening path in 2018. Meanwhile on the fiscal side, reports of an infrastructure-spending plan due in January emerged.

All eyes now turn to the last FOMC monetary policy announcement of the year. A rate hike is widely expected, with Fed funds futures implying the likelihood of one at over 98 percent. That means market-moving catalysts will come from the accompanying revision of official forecasts and the follow-on press conference with Chair Janet Yellen.

September’s outlook update had the Fed penciling in three rate hikes for 2018. For their part, the markets are not so optimistic. Although a hawkish drift has certainly happened recently, markets still have just one increase firmly entrenched in the baseline outlook, with some possibility of a second. If the Fed sticks to its guns, the greenback may rise as investors readjust accordingly.

Headlines emerging out of Washington DC are also an important consideration. Traders are weighing incremental progress toward passing tax cut legislation against increasingly assertive steps by Special Counsel Robert Mueller as he probes links between Russia and 2016 Trump campaign. On balance, anything that bolsters fiscal stimulus prospects is likely to help the US currency, and vice versa.

Optimism over ECB’s Growth and Inflation Forecasts Could Give Euro a Lift

News events, market reactions, and macro trends.

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Optimism over ECB's Growth and Inflation Forecasts Could Give Euro a Lift

Fundamental Forecast for EUR/USD: Neutral

- Futures positioning remains a major impediment for the Euro, with net-long positioning still near its 2017 high and its highest level since May 2011.

- The ECB will release new staff economic projections (SEP) on Thursday, in which there is a strong possibility that more optimistic growth and inflation forecasts are unveiled.

- The IG Client Sentiment Index suggests mixed conditions for EUR/USD in the coming five days.

The Euro finished in the middle of the pack last week, no surprise given that the Euro-Zone calendar was dry and thus exogenous influences – progress in both the Brexit negotiations and the US tax reform bill – proved to be the key driver; EUR/USD dropped by -1.04%, while EUR/GBP shed -0.39%.

While these thematic influences will remain in the news wires in the coming days, the Euro brings its own event risk to the coming week that should prove plenty market moving. The calendar is dotted with a few data releases that will generate small amounts of volatility in the coming days (on Monday, Euro-Zone and German ZEW; on Thursday, preliminary December PMIs), but the ringer this week is the European Central Bank meeting on Thursday.

Coming into the meeting, the Euro has firm fundamentals supporting it. Economic data momentum eased further last week, but remains near multi-year highs, with the Euro-Zone Citi Economic Surprise Index finishing Friday at +60.1, down from +70.3 the week prior but still higher than +58.9 a month ago. The final PMI readings for November showed that growth momentum in the region is at its strongest level since 2011.

Elsewhere, the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of price pressures, closed last week at 1.708%, higher than the 1.700% reading a week earlier, and still higher than the 1.679% reading a month ago. Given that Euro strength has sustained itself over the past few months, evidence that inflation expectations continue to trend higher should put to rest any near-term concerns that the ECB might have over tapering the pace of its asset purchases as the calendar turns into 2018.

As such, with the December policy meeting being one of the four meetings during the year that new staff economic projections (SEP) are released at, there is a strong possibility that the ECB revises its growth and inflation forecasts for 2018, and given where the aforementioned indicators stand, the risk is for a positive surprise – upside adjustments to both the GDP and CPI projections.

While the ECB seems to be following the Fed’s playbook (taper the QE program, allow some time at low rates without additional stimulus, then raise rates after a small adjustment period), implicitly, any upwards revision to the SEP will bring with it speculation that the ECB may taper their QE program faster than currently outlined, highlighting the potential for a rate hike to transpire sooner than what the market is currently pricing in (the second half of 2019 at the earliest).

It’s important to handicap our expectations of an optimistic ECB translating into a stronger Euro given where market positioning stands, as the Euro long trade in the futures market remains crowded. According to the CFTC’s latest COT report, there were 93.1K net-long contracts held by speculators for the week ended December 5,near thehighest level since the week ended May 3, 2011 (when EUR/USD peaked just below 1.5000).

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

To contact Christopher, email him at

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Dovish FOMC Rate Hike to Rattle USD/JPY Rate Recovery

Central bank policy, economic indicators, and market events.

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Dovish FOMC Rate Hike to Rattle USD/JPY Rate Recovery

Fundamental Forecast for Japanese Yen: Neutral

USD/JPY appears to be on its way to test the November-high (114.74) as the Federal Reserve is widely expected to deliver a 25bp rate-hike on December 13, but the fresh updates from Chair Janet Yellen and Co. may rattle the near-term recovery in the exchange rate should the central bank highlight a more shallow path for the benchmark interest rate.

Dovish FOMC Rate Hike to Rattle USD/JPY Rate Recovery

The 228K expansion in U.S. Non-Farm Payrolls (NFP) may encourage the FOMC to raise the fed funds rate to a fresh threshold of 1.25% to 1.50% as the economy appears to be approaching full-employment. However, the below-forecast reading for Average Hourly Earnings may force the committee to adopt a more cautious tone as many officials note ‘that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent.

With that said, market participants pay increased attention to the U.S. Consumer Price Index (CPI) as the headline reading is anticipated to pick up to an annualized 2.2% from 2.0% in October, but another 1.8% print for the core rate of inflation may ultimately dampen the appeal of the greenback as ‘a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term.

Dovish FOMC Rate Hike to Rattle USD/JPY Rate Recovery

As a result, the FOMC may largely endorse a wait-and-see approach going into 2018, and a growing number of Fed officials may trim the longer-run forecast for the benchmark interest rate as ‘many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected.’ Forecasts pointing to a more shallow path for the benchmark interest rate is likely to rattle the near-term rebound in USD/JPY, with the pair at risk of exhibiting a more bearish behavior over the remainder of the year as the Fed runs the risk of concluding its hiking-cycle ahead of schedule.

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USD/JPY Daily Chart

Dovish FOMC Rate Hike to Rattle USD/JPY Rate Recovery

Near-term outlook for USD/JPY remains constructive as the pair snaps the monthly opening range and starts to carve a series of higher highs & lows, with the November-high (114.74) on the radar as Relative Strength Index (RSI) breaks out of the bearish formation carried over from November. Keep in mind, USD/JPY has marked a string of failed attempts to close above the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement), with the pair at risk of largely repeating the price action from the summer months should the FOMC tame expectations for higher interest rates.

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GBP Set to Rally as Preliminary Brexit Shackle is Removed

Fundamental analysis and financial markets.

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GBP Set to Rally as Preliminary Brexit Shackle is Removed

Talking Points:

  • Brexit shackle removed but trade talks will be long and complex.
  • Next week’s economic calendar is full of potential market moving events.
  • Double head and shoulders broken, EUR/GBP heading south.

Fundamental Forecast for GBP: Bullish

We have turned bullish on GBP, especially against EUR after Friday’s announcement that the EU will recommend that the second phase of Brexit talks can start. Removing this fundamental block should allow GBP to drift higher against the EUR in the medium-term, especially as the ECB has no intentions of moving rates higher in 2018 with inflation at its current lowly rate.

GBP Set to Rally as Preliminary Brexit Shackle is Removed

We would take care with any EUR/GBP short position next week however as the economic calendar is packed with central bank meetings and market moving data. UK monetary policy will remain unchanged when the Bank of England meet on Thursday December 14 but commentary from Governor Mark Carney may suggest that inflation in the UK is still far too high, prompting thoughts of another 0.25% rate hike in H1 2018. We will get a look at the latest UK inflation data on Tuesday December 12 at 09:30am and updated wages and employment numbers are released at the same time on Wednesday December 13.

You can see next week’s economic calendar here.

A look at the chart below shows EUR/GBP has completed a pair of head and shoulder formations since late September and with the neckline broken, the downside beckons for the pair. Fibonacci retracement at 0.86920 has already been touched and will be broken soon, leading to the 76.4% retracement level at 0.85480. Furthermore, the pair are trading below all three ema bands, while the stochastic indicator points lower.

Chart: EUR/GBP Daily Time Frame (April – December 8, 2017)

GBP Set to Rally as Preliminary Brexit Shackle is Removed

You can check out our latest Q4 trading forecast for Sterling here.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at

Follow Nick on Twitter @nickcawley1

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

Short term trading and intraday technical levels

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Fundamental Forecast for Gold:Neutral

Gold prices fell for the third consecutive week with the precious metal down more than 2.5% to trade at 1247 ahead of the New York close on Friday. The losses come on the back of continued strength in the greenback with the DXY up nearly 0.9% as the focus now shifts to the Fed ahead of next week’s FOMC policy decision. Equity markets have also remained well supported throughout with all three major US indices trading higher into the close.

All eyes will be on the central bank next week with the Fed widely expected to hike interest rates by 25bps. The focus will be on the fresh quarterly projections on inflation, growth, and employment with the updated interest rate dot-plot of the utmost importance as traders weigh the outlook for monetary policy heading into 2018. Note that back in September, the dot-plot showed a median expectation that rates will be at 2-2.25% into next year with the longer-run (natural) rate steady at 3%.

Ultimately, the inflation outlook will likely be lead here as price growth (specifically wage growth) continues to persistently run below the Fed’s 2% target. Keep in mind that we also get the release of U.S. CPI figures just ahead of the policy announcement on Wednesday. The implication for bullion prices could be significant – remember that expectations for higher rates tend to weigh on the price of non-yielding assets like gold which does not pay a dividend. That said, tomorrow’s hike is largely priced in with markets largely calling for 1-2 hikes next year – the Fed dot plot (as of September) suggests 3-4 hikes. Look for changes in this spread to drive market reaction.

Last week we noted that, “the technical outlook heading into the December open allows for some further losses before risking major damage to the broader uptrend in bullion prices.” Indeed the losses have now taken prices to critical levels which if compromised, could change the broader outlook heading into the 2018 open.

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Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +3.96 (79.9% of traders are long)- bearishreading
  • Long positions are 0.2% lower than yesterday and 5.0% higher from last week
  • Short positions are 14.1% lower than yesterday and 10.4% 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. 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.

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Gold Weekly

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

Gold prices have approached a key support confluence highlighted in our 4Q Gold Forecast at 1240/43. This region is defined by the 61.8% extension of the decline off the yearly highs and the 50% retracement of the December advance with the long-term 200-week moving average converging on up-slope support just lower. A break below this threshold would risk a larger set-back in prices with such a scenario eyeing initial weekly support targets at 1204/12.

Gold Daily

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

A daily chart highlights the break below a key threshold we’ve been tracking for months at 1263/67 where the 200-day moving average converges on a pair of Fibonacci measurements and the October / November range lows. Look for a reaction off 1240 heading into the FOMC next week

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Gold 240min

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

A closer look at near-term price action further highlights this support zone heading into the close of the week. Look for initial resistance at 1267 with a breach above basic trendline resistance extending off the yearly highs / 100-day moving average ~1286 needed to alleviate further downside pressure.

Bottom line: from a trading standpoint I’d be looking for either evidence of an exhaustion low into this support zone OR a breach above yearly trendline resistance before tempting long exposure here heading into the Fed next week. A break /close below this region would leave prices vulnerable for a decline toward 1219 and 1204/08.

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

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The Bank of Canada: When Data Dependency Goes Awry

Price action and Macro.

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The Bank of Canada: When Data Dependency Goes Awry

Talking Points:

Fundamental Forecast for CAD: Bearish

The past two weeks have brought some important news regarding the Canadian economy. Just last week, on Friday, we saw a batch of Canadian reports that all seemingly painted a positive picture. Third quarter GDP came out a bit-higher than was expected, at 1.7% versus 1.6%. The employment front appeared especially optimistic, as there were 79.5k jobs added in Canada in the month of November against the 10k that were expected; and the unemployment rate unexpectedly took a dive-lower as we saw a 5.9% print against a 6.2% expectation. All in all, there wasn’t really much to complain about, and this set up a fairly positive backdrop as we came into this week with a Bank of Canada rate decision on the docket for Wednesday.

The Bank of Canada had a change in tone earlier this year, when in May they began to talk up the possibility of rate hikes. This led to a move in July, and another in September. But after that second rate hike in September, the bank continued to say that future policy was data dependent, and would be based on how economic performance continued to show. When we got last Friday’s batch of positive items, this started to raise some eyebrows as to whether or not we might actually see a move at this week’s rate decision.

But what actually took place was far more puzzling than what many were expecting. The Bank of Canada did not hike rates, and that, in-and-of-itself, which wasn’t much of a surprise, as expectations had only moved-up towards 20% for an actual move on Wednesday. But – tonality towards future rate hikes became significantly muddier when the BoC appeared to contradict their very own statements. The statement accompanying the rate decision noted very strong employment and wage growth, just as we’d seen last week. But then later – the very same bank noted ‘ongoing –albeit diminishing slack in the labor market’ as a reason for not adjusting rates or warning that a rate hike may be on the way. If these statements sound contradictory to you, you’re not alone. This left many market participants flummoxed, and little additional clarity has been seen since.

The immediate reaction in the Canadian Dollar was one of weakness, and prices in USD/CAD made a fairly quick jump from a key support zone towards a key resistance area of the pair’s month-and-a-half old range. But what appears to be notable here is the Bank of Canada’s response to what has been a continued improvement in the very data points that they indicated would determine future policy moves.

USD/CAD Four-Hour: Range-Bound Past Seven Weeks, Support to Resistance Round-Trip on BoC

The Bank of Canada: When Data Dependency Goes Awry

Chart prepared by James Stanley

Reading between the lines – the Bank of Canada did not want to punch through a third rate hike this year, and they likely wanted to avoid the topic altogether while the debate around NAFTA continues to rage. If there is a reason for the Bank of Canada to be extremely cautious, that would be it; and using ‘slack in the labor market’ as an excuse could accomplish the goal of providing a reason for a dovish outlook while avoiding the inevitable political fire that may start should the Bank of Canada begin openly discussing NAFTA.

The net result is the deductive read that the Bank of Canada is likely going to remain dovish, at least in the near-term, until more of these fiscal issues gain some element of clarity. This also means that we could see a continuation of CAD-weakness, very much along the lines of what’s shown with varying degrees of prominence since just two days after that last rate hike.

Next week’s data is unlikely to bring much clarity to the situation, as there are no high-impact releases out of Canada. We do get housing data on Thursday (new homes) and Friday (existing homes), and each of these could help to highlight how consistently inflation is continuing to print in the Canadian economy. The predominant focus will likely center on Central Bank rate decisions in the United States, Europe and the U.K., and this can be an opportune time to read CAD price action in the effort to see how the theme of CAD weakness may further develop.

For next week, the fundamental forecast on the Canadian Dollar will be set to bearish.

--- Written by James Stanley, Strategist for

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Australian Dollar Faces Day Of Reckoning At Fed’s Hands

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Australian Dollar Faces Day Of Reckoning At Fed's Hands

Fundamental Forecast for Australian Dollar: Bearish

  • The US Federal Reserve will very probably raise interest rates this week
  • When it does, US and Australian rates will have converged
  • With no RBA rate rises even penciled in for months, this could stymie Aussie bulls.

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At face value the coming week doesn’t look set to offer the Australian Dollar a lot of support.

There’s a dearth of economic data in any case, with very little indeed due from the currency’s home country. So by the time we get to Friday we’re not likely to know very much about Australia’s performance that we don’t know now.

Of course there’s also the US Federal Reserve’s final monetary policy meeting of the year. The result of that will hit the local newswires early Thursday morning in Asia Pacific. And here again things don’t look good for Aussie bulls. If the Fed does as just about everyone expects then it will raise the Federal funds target rate by a quarter percentage point, to 1.50%. Then it will at long last match the record-low Australian official cash rate and the Aussie dollar’s long-held, post-crisis yield advantage over the greenback will be toast.

Of course this prospect has been just about the best-flagged one in the financial world for months now, so it’s very unlikely that the fact of that rate hike will move AUD/USD very far one way or the other. What probably will, however, is the Fed’s take on how many more rate increases there might be in 2018. This will also be their de facto take on how far the US Dollar will stretch into the realm of yield advantage over the Aussie. After all, rate-futures markets are still reasonably certain that the OCR will still be at 1.50% when we get to New Year’s Eve, 2018.

At present the Fed expects to make three rate increases through the coming year, in addition to December’s. However, there are commentators who think there may yet be more than that. So, all up it’s pretty clear that the Australian Dollar is going to face a bit of pressure. It may get some respite, however, if the Fed evinces more worry about the US economy, and especially about its capacity to produce sustained inflation, than the markets now expect.

The week isn’t quite all about the Fed though. Reserve Bank of Australia Governor Philip Lowe will speak in Sydney on Wednesday. RBA speeches used to be fairly reliable Aussie-weakeners as the central bank usually lost no chance to warn markets of the harmful consequences of too much currency strength. In reality Lowe’s talk could now go either way. If he’s resolutely dovish, and perhaps repeats the RBA’s recent line that rate rises elsewhere place it under no pressure to follow, then AUD/USD could well struggle.

However, if he’s a little more bullish on domestic inflation’s prospects, then the local currency could get a little support.

That said it seems as though the Australian Dollar will have its work cut out to rise far this week so it’s a bearish call, albeit a cautious one.

This long downtrend will take some breaking. It’s unlikely to snap in the week ahead.

Australian Dollar Faces Day Of Reckoning At Fed's Hands

--- 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

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