The dollar bull run seems close to a correction

KEY THEMES

  • Treasury yields and the dollar have rallied hard in the past two weeks amidst the Trump reflation trade. However with Fed Funds interest rate futures now pricing in a 100% probability of a FOMC rate hike (according to CME Group FedWatch), the dollar bull run seems to be fairly fully priced and close to a correction, at least for now. This gives rise to some potential profit-taking in the coming days. Focus will also turn to another key factor next week as the bi-annual OPEC meeting takes place. Can the fabled oil production cuts become a reality, and if so, how long will they last for? What will the UK Chancellor’s Autumn Statement do for UK assets?

Dollar bull

  • After 10 consecutive down days for EUR/USD the market has been looking stretched. The dollar bull run hit 13 year highs for the Trade Weighted Dollar Index, however the prospect of a near term technical correction is growing. Monday’s drop on the dollar has been consolidated today but traders will be wondering over the upside potential for the dollar weighed up against the prospect of a corrective move. A further push higher cannot be ruled out, however there is considerable resistance for the dollar to break through, whilst the elastic could easily snap back for a correction from these levels. A dollar correction would also drive a rebound in commodities, with focus on precious metals.

Fed Watch

  • The market has taken Donald Trump’s initial US-focused fiscal spending as a big growth and inflation boost. However the reaction to Trump’s protectionist stance on trade could be a different story. Trump has promised to pull out of the Trans Pacific Partnership (TPP) on his first day in the Oval Office which is worryingly boisterous rhetoric (although he has tried to balance this with talk of bi-lateral deals). I believe that the push/pull reaction to Trump’s domestic (high spending/low regulation) versus international policies (protectionist/dangerous isolationist) could begin to define his Presidency, however it is far too early to tell how the market reacts to these conflictions.
  • What can we expect from the OPEC meeting? One thing for sure is that volatility will ramp up in the coming days as newflow emanating from OPEC members over a production cut will impact on the oil price. Members do seem keen for a cut of between 700,000 to 1m barrels per day and this could be for six months and maybe up to a year. This could be implemented by a 4% to 4.5% cut for each OPEC member. The clear risk is a failure to agree (although this is not expected), which is possible given the tensions between Saudi Arabia and Iran. Quite how they deal with Iran post the sanctions could be crucial. Positive newsflow over production cuts will be taken as strongly supportive for oil.
  • The new UK Chancellor Phillip Hammond gives his first major economic speech in the Autumn Statement on Wednesday. It is seen as a half year, interim update to the April Budget, and as such is likely to be seen as a move to prepare for some more major announcements in April. Spending measures on infrastructure including roads, rail and fibre broadband could feature. Hammond has already given himself some wriggle room on spending and this could mean that Gilt issuance increases by maybe £10bn to £20bn next year, which would push yields higher. Changes to taxation could include cutting the corporation tax to 17% (from 20%) and increasing the higher income tax band to £50,000. Measures to impact on housebuilding would be welcomed to combat Britain’s significant housing shortage. Brexit is still a big mover of Sterling as yesterday’s move showed after the suggestion that the government was preparing a transitional agreement for after the 2 year period post the triggering of Article 50. Any news that points towards a softer Brexit remains sterling supportive and as such any announcement Hammond makes to boost growth potential will be deemed sterling positive too.
  • It is a thin week of economic data, although the FOMC meeting minutes will be look at for suggestions of not when the next rate hike will be, but how fast future hikes will be. This is likely to be the big focus in the next FOMC meeting. However, the minutes were pre-Trump’s victory and could be a touch on the dovish side for the new market expectations. It just depends on how much weighting the market gives them. Thanksgiving on Thursday means that trading volumes will be light towards the end of the week. However the retail sales from Black Friday and subsequently Cyber Monday will become an issue.
  • Watch for: UK Autumn Statement, FOMC minutes

markets

MARKETS

EUR/USD – A technical rally towards $1.0700/$1.0800 is increasingly likely

  • The stretched dollar continues to threaten an unwinding move. Manufacturing PMIs for the Eurozone have been ticking higher and this could be supportive for the euro but this is a dollar driven play for now.
  • Support at $1.0567 has held and technical indicators are preparing for a rally, but a move above $1.0710 the old key resistance is still needed to open $1.0800, $1.0850 and $1.0950 resistance.
  • Watch for: Eurozone Manufacturing PMIs, FOMC minutes

GBP/USD – Outlook is becoming increasingly choppy again above $1.2330

  • Sterling is supported by softer Brexit newsflow and this will be the focus of the reaction to the Chancellor’s speech. FOMC minutes may not have a massive impact and would need to contain significant hawkish hints of a steeper tightening to send the dollar on another bull run.
  • The correction hung on to support around $1.2330 (just) and this remains the line in the sand. Momentum is mixed and the importance of $1.2330 is growing. A close below re-opens the old October range lows again $1.2080.
  • Watch for: UK Autumn Statement, FOMC minutes

USD/JPY – Interest rate differentials are still supportive for Dollar/Yen

  • Interest rate differentials are still supportive for Dollar/Yen and it will be interesting to watch moves on Treasury yield to drive the currency pair. FOMC minutes will clearly be watched, but how would the market react with the minutes in comparison to new expectations of a Trump presidency.
  • The market remains supported but the prospect of profit-taking with limited upside potential is growing. A move below 109.75 would trigger a corrective move. Key resistance remains at 111.45/111.90..
  • Watch for: Moves on Treasury yields, FOMC minutes

Gold – Still a sell into strength for pressure on $1200  

  • The movement on the dollar is key to the movement on gold. A dollar correction would drive a gold rally, but I still see that dollar strength will remain a theme and that gold will be under pressure.
  • The support at $1200 is critically important and the technicals remain negative which would suggest that rallies will be sold into. Overhead supply is huge around $1241/$1247 and should contain a rally if there is a move above the initial resistance at $1233.
  • Watch for: Moves on Treasury yields, FOMC minutes

Oil – Newsflow driven, positive noises from OPEC will be supportive

  • OPEC production levels remain paramount for the oil price with the OPEC meeting just round the corner. Any hints at the potential outcome from the meeting will drive the price in the coming days.
  • WTI has broken out above $46.50 and implies recovery towards $49.70, however technical will play very much a backseat role. A close back above $48.75 would re-open the key high at $51.93. For Brent Crude the resistance is $51.20 above which would open $53.70.
  • Watch for: News on OPEC production levels, EIA Oil Inventories

Indices – S&P strength is key to pulling DAX higher, FTSE more interested in sterling and oil    

  • S&P 500 – The huge rise in Treasury yields has pulled Wall Street to all-time highs on all three markets (Dow, NASDAQ and S&P). The S&P is now into blue sky territory with a band of support 2180/2194 for a pullback to find support. Can Wall Street drag other major markets through their resistance levels?
  • DAX Xetra – The range of 10,175/10,800 on the DAX has been in place for months, but now the S&P has broken higher can the DAX make a similar move? It is back within striking distance but what impact would another failure do? Support is at 10,575.
  • FTSE 100 – With Sterling having been supported in recent weeks the FTSE 100 has been underperforming. However, if oil can begin to take off again then the market will be boosted. Key near term resistance at 6955.

Economc Calendar

WATCH OUT FOR THIS WEEK

Tuesday 22nd November

  • Eurozone – Consumer Confidence
  • US – Existing Home Sales

Wednesday 23rd November

  • Eurozone – Flash Manufacturing PMIs
  • US – Durable Goods Orders
  • US – Flash Manufacturing PMI
  • US – Weekly Jobless Claims
  • US – EIA Crude Oil Inventories
  • FOMC – Meeting Minutes

Thursday 24th November

  • Eurozone – German Ifo Business Climate
  • US – Public Holiday (Thanksgiving)
  • Japan – CPI

Friday 25th November

  • US – Flash Services PMI

 

NEXT WEEK

Tuesday 29th November

  • US – Q3 GDP (prelim)
  • US – S&P Case Shiller House Price Index
  • US – Consumer Confidence

Wednesday 30th November

  • OPEC bi-annual meeting
  • Eurozone – CPI
  • US – ADP Employment change
  • Canada – GDP
  • US – Personal Consumption Expenditure
  • US – Pending Home Sales
  • US – EIA Crude Oil Inventories

Thursday 1st December

  • China – Manufacturing PMIs
  • UK – Bank stress tests results
  • Eurozone – Manufacturing PMI
  • UK – Manufacturing PMI
  • US – ISM Manufacturing

Friday 2nd December

  • UK – Construction PMI
  • US – Non-farm Payrolls
  • US – Unemployment and Average Hourly Earnings

 

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