Can the dollar rally last?


  • We may now be into the August silly season (and no, I am not just talking about Manchester United’s and City’s astronomical purchases of Paul Pogba and John Stones respectively), but the dollar is strong and risk appetite has been supported by a huge positive Non-farm Payrolls This is continuing to impact markets that are showing low volume in the peak of the holiday season. The trend is set for the dollar, but it will be interesting to see how long the dollar rally can last for. The usual move on expectations of Fed monetary policy is to swing one way and then the other. Right now the market is pulling back from excessive expectations that saw a Fed rate pushed deep into 2017. This expectation has now been pulled back to March 2017 as the next meeting that CMEGroup FedWatch is pricing a hike as probable. I am still expecting December and therefore there would be further room for this to be tightened and therefore further dollar strength. The next US data point that could shift expectations is retail sales at the end of the week.

strong dollar

  • Forex markets show this dollar strength has impacted mainly across sterling, whilst it is interesting to see that overhead resistance is beginning to stall the rally against the yen. Sterling is likely to continue to be the underperformer of the major currencies as even the more hawkish members of the MPC (namely Ian McCafferty) are talking about further monetary easing, noting the “Bank rate can be cut further, closer to zero, and quantitative easing can be stepped up”. This should continue to depreciate sterling. I do not expect the run higher on Dollar/Yen (up from 100.65 to over 102 since the payrolls report) to continue for long. The yen strength and outperformance is an ongoing trade and moves counter to this continue to provide opportunities to re-enter the trade. The BoJ will be “reassessing” its monetary policy at the next meeting and this is likely to limit any wild swings either way. The Reserve Bank of New Zealand is set to cut rates this week but judging by the strength on the Aussie since the RBA rate cut, this is no guarantee to depreciation.


  • Can equities sustain the move higher? The gains on the payrolls report are a risk positive move that comes with little pricing of any imminent rate hike from the Fed but also the positive impact on demand. QE from the Bank of England is also supportive for UK assets. Markets are holding on to 2016 highs, with the S&P 500 at all-time highs and even the DAX now breaking out to become the latest bull move. Momentum is strong and whilst the risk rally remains in place there is little to really prevent further near term gains.
  • Commodities were initially dragged by the strong dollar, but the improved risk appetite has helped the oil price to put together a series of bull candles. This improvement has now got legs to run. The strong payrolls report is positive for oil demand, but ultimately the evidence is that oil rig counts are on the up again and US production is now beginning to pick up too. This could provide a natural ceiling to a recovery on oil again. Is the support that is threatening to build on the precious metals, going to signal the next turnaround for gold and silver? Physical demand is traditionally weak throughout August, but upcoming festive seasons in China and India could begin to see this turn around. Another major central bank about to loosen monetary policy is also supportive for gold and silver.
  • The second full trading week of the month is always far quieter than the first for economic data releases and there is little really to pull traders off course until the back end of the week. The Reserve Bank of New Zealand monetary policy decision will be watched amid the prospect of another major central bank set to loosen monetary policy. A 25 basis points rate cut is widely expected this week. China’s economic data has barely impacted so far this week, but this could change on Friday with China Industrial Production and Retail Sales which are key indicators of the pace of economic slowdown and as such this series of data releases is likely to drive risk sentiment on Friday morning. Finally the US Retail Sales data will be watched on Friday as a stalling of a recent recovery is expected and this would add weight to the argument that a rate hike in front of the Presidential election is unlikely.
  • Watch for: RBNZ monetary policy, China Industrial Production/Retail Sales, US Retail Sales



EUR/USD – Bearish bias on Euro/Dollar set below $1.1050

  • The euro is under corrective pressure again as the dollar strength takes hold. There is little from the Eurozone or US to change this trend this week until US Retail Sales on Friday. However with reduced volumes this correction on the pair is beginning to stall.
  • Technically the outlook has a corrective bias but the long term pivot band $1.1050/$1.1100 is again holding up a decline. A close below $1.1050 would re-open $1.1050
  • Watch for: US Retail Sales

GBP/USD – Expect continued pressure back towards $1.2796

  • Looser Bank of England monetary policy and further hints at more to come from MPC’s McCafferty should keep sterling under downside pressure. Little data until the UK Retail Sales next week will mean the near term pressure back towards the lows could be seen.
  • The breakdown below $1.3060 and now below $1.3000 means that these levels will be eyed as a sell zone on any technical rebound this week. A retest of the $31 year low at $1.2796 is now in the offing. Momentum indicators are not only decidedly negative but also have downside potential.
  • Watch for: US Retail Sales

USD/JPY – Waiting for the technical rally to exhaust for the next chance to sell

  • The dollar strength has dragged the pair higher, but I see this as only a near term move. Already the rally is losing its way and the prospect of a change to BoJ monetary policy next month is likely to keep near term moves limited.
  • Rallies are counter trend and should continue to be seen as a chance to sell. Resistance at 102.80 is holding and a move back below 101.70 would trigger the next downside move. I still expect a test of 100 in due course.
  • Watch for: China Industrial Production/Retail Sales, US Retail Sales

Gold – Near term downside move will be another chance for a medium to longer term buy

  • Positive risk and a strong dollar have driven a gold correction in the wake of payrolls. However there are already signs that the selling pressure is dissipating. A corrective move would be counter to the bullish outlook that comes with continues loose monetary policy of global central banks and the Fed not hiking again until at least December.
  • The $1306 medium to longer term key breakout remains the important medium to longer term buying level and once this near term corrective move plays out this will prove to be another chance to buy within the trend channel for the test of $1375 and up towards $1400 again.
  • Watch for: RBNZ monetary policy, China Industrial Production/Retail Sales, US Retail Sales

Oil – Correction continues

  • The Payrolls strength has helped to drive improved risk appetite and an oil rally. Also suggestions from within some countries in OPEC that production limits need to be discussed could help to underpin the price near term. However the US oil production finding a low could cap the recovery gains.
  • Has a floor been reached at $39.20 on WTI and $41.50 on Brent crude? The technical rally is on and worth going with for now, however it could prove to be just a near term move that is unwinding recent selling pressure.
  • Watch for: EIA oil inventories to drive volatility, China Industrial Production/Retail Sales

Indices – Equities need to build support around the latest breakouts.    

  • S&P 500 – Can the S&P 500 sustain the latest breakout to a new all-time high? The support at 2148 will now take on added importance. Earnings season is all but done and the legacy of the payrolls is the key mover. But how long can it last?
  • DAX Xetra – The DAX is today breaking out above 10,474 which had been key resistance for several months. This needs a closing break abnd then the market needs to build a new base of support using the old resistance band 10,370/10,474.
  • FTSE 100 – Sterling weakness will continue to underpin FTSE 100 gains. There will now be a basis of support in the previous band 6612/6780 which should prove to be a buy zone now for any corrective moves. If the bulls get behind the rally a move towards 7000 is possible.

Economc Calendar


Tuesday 9th August

  • China – CPI/PPI
  • UK – Industrial Production

Wednesday 10th August

  • US – JOLTS jobs openings
  • US – Crude Oil Inventories
  • New Zealand – RBNZ monetary policy

Thursday 11th August

  • US – Weekly Jobless Claims

Friday 12th August

  • China – Industrial Production & Retail Sales
  • Eurozone – German GDP (prelim)
  • US – Retail Sales
  • US – PPI
  • US – Michigan Sentiment



Monday 15th August

  • Japan – GDP Prelim
  • US – New York Fed manufacturing

Tuesday 16th August

  • Australia – RBA monetary policy meeting minutes
  • UK – CPI
  • Eurozone – German ZEW Economic Sentiment
  • US – CPI
  • US – Building Permits & Housing Starts
  • US – Industrial Production & Capacity Utilization
  • New Zealand – Unemployment

Wednesday 17th August

  • UK – Unemployment and Average Weekly Earnings
  • US – Crude Oil Inventories
  • US – FOMC meeting minutes

Thursday 18th August

  • Australia – Unemployment
  • UK – Retail Sales
  • Eurozone – CPI (final)
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims

Friday 19th August

  • Canada – CPI



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