Dollar moves to continue to be data dependent


  • What an incredible turnaround on the dollar! After the strength of the payrolls report drove dollar strength, a string of disappointing recent data releases have hit the dollar hard and the bears are controlling now. This is driving key forex pairs through key levels with commodities also benefitting from the weaker dollar. The big question is how sustainable the move will turn out to be, as dollar moves tend to still be data dependent. Markets tend to move strongly in one direction and then the move will be swung back the other way. Right now the dollar is under pressure as expectations of a Fed rate hike are pushed once again back into 2017. Having recently been a close call for a December rate hike in the wake of the payrolls, market expectations of a Fed hike are once more suggesting March or May 2017 again (according to CME Group FedWatch. However just one or two positive data points could turn the situation on its head once more. I do not expect this to be a trending move that lasts for months. I expect the US data fluctuations will drive dollar fluctuations as markets are obsessed with monetary policy again (was this ever not the case?). Markets in August will often be subject to thin trading, with last week’s trading on the euro the lowest volume since Easter week. Thin markets can produce some extreme moves and can also therefore produce some trading opportunities as markets look to retrace.

Data dependent

  • Forex markets show that the dollar is getting panned against the yen and the euro. The yen has this morning broken below the hugely psychological (and also price support) level of 100.00. This is now the lowest since the spike low of 99.08 on 24th June (Brexit day). Despite the Bank of Japan recently almost doubling its ETF purchases to 6 trillion yen (c. $60bn), it looks like it is fighting a losing battel. The market disappointment has really been shown and it is almost as though it is sticking up two fingers and saying “Is that all you’ve got?”. There is a complete disregard for what the BoJ can do now, and seemingly the BoJ reassessment of the QQE program at the next BoJ meeting mid-September could be “last chance saloon”. The breakout on the euro to a seven week high is another key move. I find this move more surprising and I would be starting to look for euro selling opportunities above the $1.13s.
  • Sterling is another basket case of a currency at the moment as the pound is getting hit following on from the Bank of England decision to ease monetary policy. Near term sterling strength should be seen as a chance to sell. It is notable that today’s sharp rebound in Cable came as sterling was still weaker against the euro and yen. UK inflation rising may have triggered the initial rally against the dollar but I still do not expect this to last. Sterling is on a weakening path against all the majors and I do not expect this to change any time soon.
  • Equity markets have been strong in recent weeks, especially so since the Bank of England put into place easing measures that were greater than expected. A series of strong breakouts to new 2016 highs (and all-time highs in the case of Wall Street) have been seen. However the technical momentum on equity indices are beginning to look stretched on a near term basis and this could usher the profit takers back in. There are initial signs of this today, but it should be noted that a move just to take some of the froth off the top of a rally can often be seen as a bullish development.
  • Commodities have been solid recently as the weaker dollar has helped to underpin prices. The sharp rally on oil is a key supportive move for market sentiment, but again can this move be sustained? Technically again there are now several key overhead barriers to gains on oil which could begin to slow the rally. However if these can be overcome then the bulls could easily sustain a push back to the highs again. The dollar weakness has certainly played a part but also suggestions that producers may push for production freezes again. History tells us that this tends to be a fruitless task, but for now it is propping up prices. Again the question is how long prices can rally before the market patience for these rumours runs out.
  • Perhaps the one disappointment amidst this dollar weakness is the lack of upside traction on gold. Gold has developed in to a near to medium term consolidation play (despite the strong long term outlook above $1306. The technical are still positively biased and it could be that gold will be late to the party, however the chart of gold prices in euros simply shows a consolidation. This could just be a summer lull before the crucial buying seasons begin for India and China in the coming months, but it is still disappointing.

gold in euros

  • Economic data will focus on the UK and US this week, so Cable will be a key pair to watch. After the inflation data on Tuesday, UK earnings growth (as part of unemployment data) will impact on sterling and for now, UK earnings (2.3% YoY ex-bonus expected) continue to grow faster than inflation. Could the FOMC minutes help the dollar to turn a corner on Wednesday? The minutes will add more meat to the bones of the July meeting and traders will be looking out for what the committee sees as the impact of Brexit and also the international position in what was seen as a mildly hawkish shift in the FOMC statement. UK retail sales for July will be the next piece to add to the post-Brexit jigsaw, whilst the British Retail Consortium believes that retail sales may not have been impacted too badly it will be interesting to see if this is the case.
  • Watch for: US CPI, UK earnings growth, FOMC meeting minutes, UK retail sales



EUR/USD – Upside breakout and hold above $1.1233 opens highs again

  • With dollar data underwhelming the relatively stable Eurozone data is helping to drive the euro higher against the dollar. Can this be sustained? The next ECB meeting is on 8th September, so it is likely that US data is going to drive the outlook for the pair.
  • Technically the break above $1.1233 to a seven week high is a strong move (especially if it can close above there). This could then open the pre-Brexit high at $1.1432 and the prospect of testing the old long term range highs above $1.1465 again. Momentum is increasingly positive on a near term basis.
  • Watch for: US CPI, FOMC minutes

GBP/USD – Expect continued pressure back towards $1.2796

  • A near term rebound on the slight increase in UK inflation is likely to peter out with sterling continuing to be the big underperformer of the major currencies. I do not expect the dollar weakness to last for too long and this will give another chance to sell Cable. The UK data this week will provide lots of volatility as it will paint a picture of how Britain is looking in the immediate aftermath of Brexit.
  • Breaking below $1.3060 opened the lows at $1.2796 again, and I see any rallies (such as today) to be a chance to sell. I am now looking for the next sell signal as I do not see this move is sustainable. Technical indicators are unwinding and this should provide the downside potential for another leg lower.
  • Watch for: US CPI, UK earnings growth, FOMC meeting minutes, UK retail sales

USD/JPY – A close below 100.00 is very bearish

  • Weak US data and a view of ongoing yen strength only serves for a negative outlook for the pair. The earliest sustainable change of this may come in mid-September with the BoJ and whilst positive US data points may give a brief upside blip to trade, this will be seen as an opportunity to sell.
  • The July low of 100.02 was the market considering the implications of yen strength in the post Brexit world. A close below 100 therefore would be a huge signal that the yen strength would continue. A test of the spike low of 99.08 would follow but momentum is very negative.
  • Watch for: US CPI, FOMC minutes

Gold – Can the bulls sustain a break above $1357?

  • I remain long term bullish on gold above $1306 with the fundamental arguments (negative real interest rates and increasingly loose major central banks) all still in place. Could this also be just a summer lull (August tends to be a month of subdued demand for physical gold before wedding season kicks in) before the next leg higher?
  • Strong gains could be seen if gold can close decisively above $1357. This is a second lower high (below $1367) and could reignite the bulls who have been quiet recently (despite the dollar weakness). Long term technical indicators remain strong and I still favour buying into weakness for a long term upside break towards $1400 and beyond.
  • Watch for: US CPI, FOMC minutes

Oil – At a key technical crossroads

  • Volatility is still seen on Wednesdays with the EIA inventories report, whilst the suggestion that countries such as Venezuela are pushing for meeting on a production freeze has helped to bolster prices. However the sheer stabilization of prices on rumours such as these ultimately reduces the need/likelihood of OPEC consensus on production freezes.
  • A huge rally in the past couple of weeks is now back to a key technical crossroads on WTI. A two month downtrend, Fibonacci retracement and 21 day moving average are all providing resistance around $46. A decisive breakout could see a run back towards the highs, however will the profit-takers get twitchy again?
  • Watch for: EIA oil inventories to drive volatility, US CPI, FOMC minutes

Indices – Can equity markets hold off the profit-takers?    

  • S&P 500 – Creeping gains once more on the S&P 500 and a move back to new all-time highs. Momentum looks strong and solid and there is still no real need for any profits to be taken off the table, but if European markets start to stumble, will Wall Street manage to prevent the same?
  • DAX Xetra – A huge run higher on the DAX in the past couple of weeks has seen its first real suggestion of a stumble leaving resistance around 10,800. With the RSI turning lower from 70 could the profit takers move in now to unwind some of the recent exuberance? There is good support between 10,370/10,470.
  • FTSE 100 – UK equities are bullish on sterling weakness and Bank of England easy monetary policy. A run higher has taken the RSI on FTSE 100 above 70 and this could usher profit-takers back in. A correction would still be healthy though with 6745/6810 a good support area now.

Economc Calendar


Tuesday 16th August

  • 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



Tuesday 23rd August

  • Eurozone – Flash Manufacturing PMIs
  • US – Flash Manufacturing PMI
  • Eurozone – Consumer Confidence
  • US – New Home Sales

Wednesday 24th August

  • US – Existing Home Sales
  • US – Crude Oil Inventories

Thursday 25th August

  • Eurozone – German Ifo Business Climate
  • US – Durable Goods Orders
  • US – Weekly Jobless Claims
  • ALL – Jackson Hole Symposium

Friday 26th August

  • Japan – CPI
  • UK – GDP (Q2 2nd reading)
  • US – GDP (Q2 Preliminary)
  • US – Michigan Sentiment (revised)
  • ALL – Jackson Hole Symposium

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