Is dollar strength finally set to break the ranges?


  • The last few months have been characterised by major markets being stuck in a series of sideways ranges, unable to find any real direction. However, with the onset of a new quarter, there are increasing signs of some key moves developing that could break the ranges. Renewed strength on the dollar is the basis behind many of the moves. But the big question is whether this can continue? The dollar has been on several strong near term trending moves in 2016, but each time the moves are subjected to a retracement. Will this time be any different? There are a lot of volatility factors to look ahead to in the final quarter of the year, however the Presidential Election and the prospect of a Fed rate hike are the standouts. With uncertainties in the markets, I expect the dollar is unlikely to go on a tear over the coming weeks. For me that means that expectations of who will be the next US President will be key in the coming weeks, as will the US data and the rhetoric of key FOMC members.

dollar strong

  • Although the market feels pretty sanguine about the Presidential Election at the moment, all it could take is a strong showing of Trump in one of the final two debates and market fears could be stoked once more. Clinton would be the market neutral/positive victor being the continuity candidate and she is ahead in the polls by two or three points. Subsequently, there has been little pricing of the uncertainty that a Trump victory would bring. However if the Brexit referendum teaches us anything it is not to underestimate the strength of feeling that people currently have for more populist, anti-establishment representation. Trump is by no means out of it and I believe that it is likely to be increasingly tight in the coming weeks. That would ramp up the volatility in markets.
  • UK assets are also in focus with the announcement that Theresa May the UK Prime Minister is getting ready to trigger Article 50 on the UK’s exit from the EU by the end of March 2017. Signals out of the Conservative party also suggest that focus is more on controlling immigration (i.e. freedom of movement of people) than it is on the best trade deal negotiated with the EU. May has also suggested that the City Of London (i.e. UK financial services) will not get special treatment in the negotiations either (putting the banks’ passporting rights at risk). Subsequently concern over a possible “hard Brexit” is now elevated and sterling has been sold off. Sterling has fallen to a 31 year low against the US dollar, whilst EUR/GBP has also broken higher. The flip side of a weaker sterling has been a huge upside surge on the FTSE 100 again. If anyone had forgotten the negative correlation between sterling and FTSE 100 (due to more than 70% of FTSE 100 revenues being generated in a foreign currency), there was a significant reminder in the past few days, and this is a trade that can certainly be seen if sterling remains under pressure. FTSE 100 is now within touching distance of the all-time high at 7122.


  • Yesterday’s reaction to the better than expected ISM Manufacturing data shows how US economic data can still move markets. The US dollar has been strengthening too on the back of hawkish comments from Loretta Mester. This suggests that the market is still focused on the Fed. With Non-farm Payrolls coming up on Friday the market will be anticipating volatility as usual, but this time we could see risk appetite performing in line with the data. With the FOMC increasingly likely to hike in December (CME FedWatch futures imply a 62% probability), this means that the next couple of months will be driven by positive data being positive for risk. The dollar strength seen in recent sessions may not yet have been able to break the tedium of the Euro/Dollar range, but with Cable breaking down, Dollar/Yen breaking its 9 month downtrend, the key moves are being seen. Is gold the next range to break down (dollar strength is negative for gold)? In commodities, we have seen the dollar strength driving precious metals weakness, but the oil price has the support of the OPEC production cut to help it. In front of the OPEC meeting at the end of November this should help to underpin the price, however it will still be news of supplies from Iran, Libya and perhaps even Nigeria to pull the price around near term, of course in addition to the weekly volatility from the EIA inventories.
  • The services PMI data will drive volatility on Wednesday and keeping in mind the UK PMIs have been beating expectations recently, there could be another positive outcome from the UK services PMI, which could drive a retracement of the recent sterling weakness. Watch also for the US ISM Non-Manufacturing also pulling volatility. Friday’s Non-farm Payrolls will be the key event of the week though. The headline is not expected to be much at 170,000 but the market will be looking at the average hourly earnings, as if they pick up, in addition to the unemployment rate at or just below 4.9% then the market will take this as a strong dollar move. Also watch for the participation rate, as a rise at the same time of number of hours worked increasing would also be considered positive for the US economy and therefore positive for the US dollar but also risk.
  • Watch for: UK Services PMI, ISM Non-Manufacturing, Non-farm Payrolls



EUR/USD – Strong Non-farm Payrolls could drive a downside break

  • US economic data is picking up (as are inflation expectations) and this is helping to pull a stronger dollar. The Payrolls report is a big volatility factor but a solid/strong report could mean that the pair finally breaks its tedious sideways range.
  • Technically the outlook remains neutral whilst above $1.1120 with the $1.1100 long term pivot still underpinning the market. There needs to be a decisive catalyst to break the converging trendlines, maybe payrolls will drive the breakout?
  • Watch for: ISM Non-Manufacturing, Non-farm Payrolls

GBP/USD – “Hard Brexit” fears driving sterling lower

  • Suggestions are that the UK Government may focus on immigration for Brexit negotiations and this means sacrificing access to the Single Market, which is driving fears for the economic growth in the UK. Sterling is under pressure and continued headlines this week should sustain this. Perhaps a strong Services PMI number on Wednesday could provide some brief respite but the bears seem happy to pull Cable lower now.
  • A closing break of $1.2796 means there is no support on Cable and the downside is open. Selling rallies seems to be the way to play Cable now.
  • Watch for: UK Services PMI, ISM Non-Manufacturing, Non-farm Payrolls

USD/JPY – Breaking the downtrend improves the long term outlook

  • Dollar strength is finally gaining some traction as positive US data is helping a rebound. However can this continue? Inflation expectations in the US have started to pick up, but US data will drive volatility. Key then is ISM Non-Manufacturing and Non-farm Payrolls this week.
  • The big floor around 100 yen has held and the longer this happened the bigger than chance of a break of the long term downtrend – which has now been seen. However a break higher above key resistance is needed to confirm a medium term bull improvement. Resistance at 102.80 is near term, but 104.30 September high is key.
  • Watch for: ISM Non-Manufacturing, Non-farm Payrolls

Gold – Will the dollar strength induce a medium term breakdown below $1300  

  • Dollar strength is a concern for the gold bugs. Hawkish Fed members, better US data and improving inflation expectations are all positive for the dollar and therefore negative for gold. However, China festival season and India’s wedding season are supportive on the demand side in the coming weeks.
  • Technically the breakdown would be below the September low at $1302, so a close below the psychological $1300 would be the big breakdown. It has though not happened yet and on several times in the past few months a similar corrective move within the medium term range have been supported. A two day close below $1300 would confirm a top pattern and a $50 to $75 downside target.
  • Watch for: ISM Non-Manufacturing, Non-farm Payrolls

Oil – Volatile, choppy but support should be underpinned

  • Supplies out of Iran and resumed output capacity in Libya and Nigeria would put near term pressure on, but the OPEC cut agreement story should help to support the price.
  • Support is now key at $43.00 on WTI and $45.30 on Brent Crude, but the bulls will be looking for any near term corrections to be supported at $46.50 on WTI and would look for $48.00 to hold on Brent Crude.
  • Watch for: ISM Non-Manufacturing, EIA Oil Inventories, Non-farm Payrolls

Indices – S&P and DAX still range as FTSE 100 soars    

  • S&P 500 – The S&P 500 has been treading water (albeit with elevated volatility) in recent weeks, but perhaps the market will begin to take direction from Q3 earnings season and increasingly the Presidential Election in the coming weeks. The all-time high at 2193 is resistance.
  • DAX Xetra – The DAX is still impacted by the performance of Deutsche Bank and is a significant underperformer now. The resistance overhead between 10,7000/10,800 is a barrier.
  • FTSE 100 – The negative correlation with sterling means the UK currency could drive the near term performance of the FTSE 100. The market is now testing the all-time high at 7122, with support now in the band 6955/7070.

Economc Calendar


Wednesday 5th October

  • UK – Services PMI
  • US – ADP employment change
  • US – Trade Balance
  • US – ISM Non-Manufacturing PMI
  • US – Factory Orders
  • US – Crude Oil Inventories

Thursday 6th October

  • US – Weekly Jobless Claims

Friday 7th October

  • UK – Manufacturing Production
  • US – Non-farm Payrolls
  • US – Unemployment & Average Hourly Earnings



Monday 10th October

  • US public holiday – Columbus Day

Tuesday 11th October

  • Eurozone – German ZEW Economic Sentiment

Wednesday 12th October

  • US – JOLTS job openings
  • US – FOMC meeting minutes (September)

Thursday 13th October

  • China – Trade Balance
  • US – Weekly Jobless Claims
  • US – Crude Oil Inventories

Friday 14th October

  • China – CPI & PPI
  • US – Retail Sales
  • US – PPI
  • US – Michigan Sentiment


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