Highlights:

  • USD weakness reinforced on soft CPI print, fifth straight weekly miss of expectations
  • EUR appears set to remain strong currency as JPY strength lacks staying power
  • Background of weak USD and geopolitical tensions favoring Gold as it approaches $1,300
  • Sentiment Highlight EUR/GBP favored higher as retail positions build short exposure

Friday’s Consumer Price Index miss was reason enough for traders already skittish on USD strength to bail on that currently unfounded view. Traders in fixed income/bond markets scaled back expectations that the Fed would hike again in 2017, which pushed the USD back below 93. Another reason why the Fed is unlikely to surprise the market with a hike is that we could be working on the SPX’s worst week since April. The weakness in riskier assets was undoubtedly elevated on a war of words between North Korea’s, Kim Jung Un and US President Donald Trump that have ranged from the later of ‘fire and fury’ to ‘locked and loaded.'

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Despite the weakness in USD and risk assets, it does appear that by the market expecting the Fed to stay on hold with rates, while likely pushing ahead with a balance sheet run-off, that the dollar could remain subdued while other currencies like the EUR could remain resilient. The main risk for Euro bears, those that are left, is that Mario Draghi will bring about a hawkish conclusion to the next steps of monetary policy for the ECB when he speaks at the Kansas City Federal Reserve Symposium at Jackson Hole Wyoming during Aug 24-26. In the meantime, the markets will likely look to ECB minutes next Thursday to see if there is any preclusion that Draghi will lean hawkish later this month.

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Looking to the commodity sector, Gold looks to have a few developments going its way as it approaches a possible breakout to new 2017 highs. While precious metals have been eschewed in favor of base metals this year, a weak USD and geopolitical tensions, which are unlikely to take a break over the weekend, point to a favorable environment for haven gains. Indeed, the rise in the JPY this week was largely attributed to both the weak USD & tough talk, and the JPY is positively correlated to Gold as a haven asset.

However, if XAUUSD fails at $1,300 and the USD begins to show life and turn higher, there could be a rather ugly outlook for gold. The current pattern looks similar to the resistance seen at $1,800 in early 2012 before a sharp drop to $1,200 occurred within a year. Let’s hope, if you’re a Gold Bull, that a similar fate does not await.

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FX Closing Bell Top Chart: Weekly Gold chart looks set to break through $1,300, avoiding triple top

USD And Fed Hike Odds Fall After CPI Miss, Gold Price Tests $1,300

Chart Created by Tyler Yell, CMT

Next Week's Main Event:GBP Consumer Price Index (YoY) (JUL) - Tuesday

IG Client Sentiment Highlight:EUR/GBP favored higher as retail positions build short exposure

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

USD And Fed Hike Odds Fall After CPI Miss, Gold Price Tests $1,300

EURGBP: Retail trader data shows 26.0% of traders are net-long with the ratio of traders short to long at 2.85 to 1. In fact, traders have remained net-short since May 16 when EURGBP traded near 0.84601; theprice has moved 7.5% higher since then. The number of traders net-long is 1.9% lower than yesterday and 24.5% lower from last week, while the number of traders net-short is 4.4% higher than yesterday and 4.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURGBP prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURGBP-bullish contrarian trading bias.(Emphasis added)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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