Dollar may retreat in absence of near-term catalysts
The US Dollar accelerated upward last week, powered by a hawkish Fed monetary policy announcement. Central bank officials upgraded their assessment of overall growth, employment and inflation to signal that two more rate hikes are probably on the docket before year-end.
On the data front, the spotlight now turns to July’s CPI report. The headline and core inflation measures are expected to register unchanged from the prior month at 2.9 and 2.3 percent on-year respectively. Such results would be broadly consistent with the Fed’s confident posture.
While this is supportive of the greenback’s overall uptrend, it may fall short of offering sufficient impetus to drive near-term gains. Indeed, even after last week’s hawkish FOMC statement, the priced-in probability of a December hike barely budged from 60 percent.
This hints the US unit may need more than just reinforcement of the status quo to sustain upward momentum. On-going trade war tensions between Washington and Beijing may offer a catalyst. If escalation triggers risk aversion, the currency’s unrivaled liquidity may re-establish support from haven-seeking capital flows.
External developments ought to be kept in mind as well. Crosscurrents following the RBA and RBNZ rate decisions via AUD/USD and NZD/ USD might echo as drivers of USD more broadly in the absence of other influences. Dovish outcomes on both fronts might mean such forces are nominally helpful.
These considerations aside, the absence of fresh fodder locally might translate into a consolidative tone. CFTC positioning data reveals a steep build in speculative net-long US Dollar exposure recently, opening the door for profit-taking that breaks the currency’s four-week winning streak.
We remain neutral on GBP for the week ahead but recognize that Brexit headlines and noise may move Sterling sharply in either direction, especially in a holiday-thinned market. So far, the EU has given no indication of being flexible towards the UK, repeatedly saying that their four pillars are sacrosanct, and that the UK must offer more before talks can press forward. In what is becoming a Brexit binary market, any good/bad news could well have an out-sized reaction, especially in a low volume, holiday-thinned market.
This week’s BoE meeting produced the expected 0.25% rate increase, but governor Mark Carney warned that future rate hikes will be gradual and limited. The next fully priced-in UK rate hike is now seen in September 2019. Post-BoE governor Carney agreed a good rule of thumb would be one rate hike per year although it will still depend on what happens during Brexit discussions.
Next Friday, a slew of 15 UK data releases at 08:30GMT includes the first look at Q2 UK GDP which is expected to nudge higher. The new monthly reading is expected at 0.2%, the quarterly figure at 0.4% from a prior quarter’s 0.2% while the annual figure is expected to show the economy growing at 1.3% against a prior 1.2%. If all these targets are hit, Sterling may receive a small fillip, but any misses would push GBP further lower.
GBPUSD continues to trade either side of 1.3000 and needs a stimulus to breakout from here. The downside still points to 1.29550 ahead of the August 2017 swing low at 1.27738, while a move higher will find resistance and the 20- and 50-day moving averages at 1.31262 and 1.32058 respectively. The RSI indicator is pointing lower and nears oversold territory.
USD/JPY pares the advance from late-July as the below-forecast U.S. Non-Farm Payrolls (NFP) report dampens the outlook for growth and inflation, and data prints scheduled for the first full-week of August may continue to drag on the exchange rate as attention turns to the updates for the Consumer Price Index (CPI).
Even though the headline reading is expected to increase 3.0% per annum in July, which would mark the fastest pace of growth since 2011, the core rate of inflation is anticipated to hold steady at 2.3% for the second consecutive month. The CPI figures may add to the bag of mixed data prints as the NFP report disappoints, and another set of lackluster developments may keep USD/JPY under pressure as it rattles bets for four Fed rate-hikes in 2018.
Keep in mind, recent comments from the Federal Open Market Committee (FOMC) suggest the central bank has no intentions of deviating from its hiking-cycle as the ‘Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.’
Oil prices continued to move lower this week as global markets wrestle with the prospect of increased production. In late-June, OPEC and a group of ten non-OPEC oil producing countries announced that supplies would be increased as production caps were lifted in the effort of offsetting Iranian production after US sanctions go into effect. This move also brought the potential to moderate the hefty gains that had been seen over the past year, which have nudged inflation numbers-higher across the world, even catching the ire of President Trump. In late-May, Brent crude temporarily eclipsed the $80 level, and WTI topped $75 in early-July: Both markets are now in the midst of a pullback as US inventories are piling up to go along with this backdrop of increasing global production.
All hope is not lost for Oil bulls, however, as we still have the potential for supply shocks given some of the geopolitical tensions that have flared in key producers like Venezuela or Iran, and this may be an operative reason for a hold of support this week despite the continued threat of increasing supplies.
Gold prices are lower for the fourth consecutive week with the precious metal down 0.45% to trade at 1218 ahead of the New York close on Friday. Continued strength in the US Dollar has kept pressure on gold with the DXY trading just below the yearly highs on the back of this week’s FOMC interest rate decision. The decline to fresh yearly lows in gold saw prices respond to a key near-term support range on Friday- but with key US inflation data on tap and rising geo-political tensions at the forefront, can gold prices build on this recent recovery next week?
US Non-Farm Payrolls (NFP) missed expectations on Friday with a print of 157K – however an upward revision to last month’s read to 248K and a downtick in the unemployment rate to 3.9% overshadows the headline read and continues to highlight underlying strength the labor markets. The release does little to impact the pace of monetary tightening with Fed fund futures still pricing-in rate hikes in September and December (in-line with the central bank’s outlook). The release further fueled a rebound off key support in gold prices with prices rallying more than 1% off the weekly lows.
Looking ahead to next week, traders will be eyeing the release of the July US Consumer Price Index (CPI) with consensus estimates calling for a hold at 2.3% y/y. With employment largely AT the central bank’s ‘natural’ running rate, the focus remains on the inflationary outlook – for gold, a stronger print next week could further fuel expectations that the Fed may need to hasten its normalization process next year (a bearish development for gold which tends to weaken as interest rate expectations climb). From a technical standpoint however, the damage done by the recent breakdown casts a shadow on the near-term price outlook and the focus is on whether price can build on this rebound next week.
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