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Tempered Dollar Recovery Looks to Trump, NFPs while Pound Awaits BoE

Tempered Dollar Recovery Looks to Trump, NFPs while Pound Awaits BoE

2017-11-02 04:11:00
John Kicklighter, Chief Strategist
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Talking Points:

  • As expected, the Federal Reserve held its benchmark rate range unchanged at its meeting which left the Dollar adrift
  • The Greenback is still on the action side of its bullish breakout but lacking drive, Trump's Fed pick and NFPs are key ahead
  • With both the USD and general risk trends groping for motivation, the Pound is set to find a fundamental shove from the BoE

What are the DailyFX analysts' fundamental and technical forecasts for the Dollar, Euro, equity indexes and more through the fourth and final quarter of the year? Download the recently-released 4Q forecasts on DailyFX.

The Federal Reserve offered Dollar traders no resolution - whether they were bulls or bears. Though the top piece of event risk this past session (amid an otherwise crowded docket), the event managed to only meet a heavily expected outcome. At the close of their meeting, the US central bankers voted unanimously to hold interest rate unchanged in its range between 1.00 and 1.25 percent. That surprised no one as the market had assigned a near 100 percent probability that just such an outcome would be realized according to swaps and Fed Fund futures. The interest for Dollar traders and other US markets was what the intention would be for policy down the line. On that front, the overtly transparent central bank offered little new detail on its plans that it hadn't already established in previous meetings. The statement indicated that the group was still concerned by the persistently weak state of inflation and was particularly troubled by tepid wage growth. In the meantime, they felt growth was healthy and price pressures would eventually normalize after transitory factors. This is what markets have come to expect, so the Dollar' was understandably left adrift.

However, the lack of impact from the Fed leaves Dollar traders with some degree of anxiety - I know I am effected. The Greenback has this past week produced a key bullish technical breakout in the form of an inverse head-and-shoulders pattern for the DXY which is a mirror of the EUR/USD's slide below 1.1675. However, a break - and more pointedly a reversal - require deeper currents of conviction. That means there is a need for stronger fundamental drive. The longer hope like that provided to Dollar bulls is left unfulfilled, the more readily it can fall apart. There will be further opportunity for the Dollar to stoke conviction in the days ahead, but no guarantee that it will be found. Today, President Trump is due to announce his choice for the next four year term Fed Chair. Recent favorites circulated by the media include current charge Janet Yellen, board member Jerome Powell and former board member Kevin Warsh. A WSJ report this afternoon suggested that the President has already decided on Powell, but I am skeptical of the commitment. Regardless, if the outcome is any of these three characters, the 'worst' case scenario is status quo and there is some degree of further hawkishness from the other leaders.

Aside from the Dollar, the other dominant theme to keep regular tabs on is sentiment themes. Risk trends were untouched by the Fed decision this past week, and the spectrum of those oriented assets are on very different paths - from the high-flying German DAX to the stumbling HYG junk bond ETF. Perhaps progress on US tax reform or Apple's earnings report can provide. More likely, they will not. A more promising event risk is the BoE rate decision. The markets heavily favor a rate hike from the UK central bank and the contrast to counterparts like the Euro and Yen can generate serious impact. My preferred pairs to monitor (for different outcomes) are GBP/USD, EUR/GBP, GBP/JPY and GBP/NZD. Where technicals are just as promising but fundamentals woefully lacking, we have oil's rally falling 2 cents short of the January high which in turn confirms a longer-term range high just around 55. Meanwhile, Bitcoin has extended its drift to fresh record highs as speculative appetite follows the CME's bid for approval on cryptocurrency futures. We discuss all of these trends, moves and options in today's Trading Video.

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Tempered Dollar Recovery Looks to Trump, NFPs while Pound Awaits BoETempered Dollar Recovery Looks to Trump, NFPs while Pound Awaits BoETempered Dollar Recovery Looks to Trump, NFPs while Pound Awaits BoE

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