US data is key with the Fed’s dual mandate in focus



The US dollar has been rallying hard over the past couple of weeks. The reason being that the Fed is finally starting to see some traction in its indicators that it focuses on in the drive to maintain its dual mandate meaning US data is now key. Inflation is now finally starting to creep through the system and this will now give the FOMC a big decision to make in the coming months. Surely a March rate hike will still not be seen, but if the trends continue, what about June? Maybe two 25 basis points hikes, one in June and one in December ss not so fanciful now? Markets tend to over-react and this is helping to drive this dollar rally. However, this could be a concern as, although the upward revision of GDP was welcome, the forward looking data (mostly the PMIs) are not especially encouraging. Furthermore, the strengthening dollar is naturally a monetary tightening factor, whilst also impacting on growth. I am still not expecting a sustained bout of dollar strength and I am still concerned by the lack of growth, which with rising inflation means a negative impact on REAL growth.




Key US economic data points that measure inflation and growth have been improving and this has allowed the yields on US Treasuries to increase sharply. The 2 year Treasury yield which is seen as a measure of expectations of US monetary policy has rallied sharply from a recent nadir of 0.582% to now be pushing towards 0.8% and 4 week highs. This has had a significant impact on the US dollar which has also been rallying strongly in the past couple of weeks. However with such a raft of tier one economic data for the US this week his week could be pivotal for the dollar, and the omens are mixed. The PMI data has been really disappointing in recent months, reflecting a slowdown in the US regional Fed surveys. The flash services PMI data last week was a big miss of expectations, falling into contraction and with the service sector driving the meagre US growth that is there, this is a concern for this week’s ISM data. The Payrolls report is likely to show another solid report, whilst the expectation is that earnings growth will continue to improve to 2.4%, a sign of impending inflation.


All the while, the oil price continues to rally and we must now consider the prospect that a major low has been seen around $26/$27 (depending upon whether you look at WTI or Brent Crude). Technical base patterns are building nicely (Brent has already today broken out above $36.25 resistance) and the long term downtrends are being threatened. The potential for an OPEC + Russia production freeze has helped drive the improvement, but this is still built on shaky ground. Could an agreement last and will it make a difference? For now though the improvement in oil is helping the risk rally.




The risk rally is also being helped by an improvement in metals prices. In today’s quarterly results from major mining company, Glencore, the CEO Ivan Glasenberg said that he felt that a bottom was now in place on metals prices and that sales in China were “pretty good”. This is a supportive comment for the industry which has been so concerned by the slowdown in China. For now though the economic data in China does continue to slowdown and today’s PMI data for both manufacturing and services is still a concern, falling to multi-year lows. The continued loose monetary policy (PBoC cutting the RRR by another 50 basis points) has helped the risk rally, but economic data out of China remains a concern that could still upend the recent recovery.


Therefore, the US data could be crucial again, with massive focus to the ISM manufacturing this afternoon (expected to slightly pick up to 48.5) and the ISM Non-manufacturing on Thursday (expected to drop into contraction at 49.8). What does it say about the US economic going forward if these two major indicators imply the US is contracting? Non-farm Payrolls will always grab the headlines on Friday but also the average hourly earnings will be keenly watched. Anything above 2.3% will boost the dollar.


Watch for: ISM Manufacturing, ISM Non-manufacturing, Non-farm Payrolls






EUR/USD – A test of $1.0800 comes as the dollar continues to strengthen

  • As the market prepares for the ECB next week the euro is under pressure. Falling Bund yields suggests that the market is preparing for big action from the ECB. However this is coming as the dollar is strengthening. There will be volatility this week with the key US data, especially on Friday with Payrolls.
  • Negative configuration on the momentum indicators, a broken 3 month uptrend and the outlook is set to push big pressure on the old key support band around $1.0800. A close below $1.0710 would even re-open the key range lows.
    • Watch for: ISM Manufacturing, ISM Non-manufacturing, Non-farm Payrolls


GBP/USD – The psychological level at $1.4000 is now crucial

  • Threat of a Brexit remains the big millstone round the necks of the sterling bulls and should prevent too much upside should a recovery begin to come through. The UK economic data also continues to disappoint with much focus now turning to the UK services PMI. Expect volatility with the US data though.
  • Technically the breach of the January low and a failure of the $1.4000 key psychological support remains an issue and this means $1.4000/$1.4080 is an area of overhead supply. Momentum indicators do not suggest a low is in place and I expect a retest of $1.3835 and potential further downside towards the 2009 lows $1.3500/$1.3650 .
    • Watch for: ISM Manufacturing, UK Services PMI, ISM Non-manufacturing, Non-farm Payrolls


USD/JPY – Resistance at 113.50 now with pressure on 110.98

  • The yen strength is still an issue, but with the risk rally and the dollar also strong, the prospect of a key low being in place at 111.00 is there. With the PBoC loosening by cutting the RRR and the prospect of major action from the ECB means that the BoJ are likely to be forced into additional easing measure that could also help to pull the USD/JPY pair higher.
  • The near term outlook is mixed and a bit messy, but with the improving momentum indicators the outlook for a recovery is building. Continued closing support above 112.00 will help this, as would a move above 114.00.
    • Watch for: ISM Manufacturing, ISM Non-manufacturing, Non-farm Payrolls


Gold – Bulls remain in control but for how long?

  • Despite the improvement in risk appetite and the dollar strength, gold has continued to rally. This is not a situation that I find sustainable though and I think that it is gold that may in the end succumb after a huge rally.
  • Gold is moving higher, but the momentum indicators do not confirm the move and this is a concern. The closing high at $1246 dates back 13 months and this is under pressure along with the intraday spike at $1260. I have to remain a cautious bull because of the momentum and I am ready to change my outlook on the posting of a negative signal.
    • Watch for: ISM Manufacturing, ISM Non-manufacturing, Non-farm Payrolls


Oil – Long term bearish arguments are being broken

  • Developments over any OPEC agreement are still able to drive sentiment.
  • The primary downtrends that date back 18 months on the oil prices are coming under huge pressure as the improvement continues. Brent Crude has already broken a resistance at $36.25 and broken its 18 month downtrend, whilst WTI is looking to follow suit, needing a move above $34.80. Momentum also continues to improve as the prospect of a sustainable low and possible recovery is building.
    • Watch for: Developments over the OPEC oil production freeze


Indices – Correlation with oil still has a role to play

  • S&P 500 – The breakout above 1947 last week reflects a continued improvement, whilst the support needs to hold at 1890 on a correction to maintain the improving outlook. The concern I have is that sustained improvement needs solid revenue and earnings growth, which is questionable amidst the concerning signs in US economic growth data.
  • DAX Xetra – Once more the old 76.4% Fibonacci retracement at 9308 has played a role and is now a basis of support for the recovery. A breakout above 9600 is bullish and should now open the way towards 9897, the 61.8% Fib level. This is another market very much driven by market sentiment and the rebound in commodity prices has a big part to play there. Further ECB easing would also be a boost.
  • FTSE 100 – The significance of FTSE 100 breaking above 6115 should not be underplayed, especially if there is a closing breakout and a move above the falling 144 day moving average currently at 6150 (something not seen since June 2015). Watch out for the RSI as a move above 62 has not been seen since the top back in April 2015.






Tuesday 1st March

  • Canada – GDP (monthly)
  • US – ISM Manufacturing PMI


Wednesday 2nd March

  • Australia – GDP (Q4 2015)
  • UK – Construction PMI
  • US – ADP Employment Change
  • US – Crude Oil inventories


Thursday 3rd March

  • Australia – Trade Balance
  • China – Caixin Services PMI
  • UK – Services PMI
  • US – Weekly Jobless Claims
  • US – ISM Non-manufacturing PMI
  • US – Factory Orders


Friday 4th March

  • US – Non-farm Payrolls
  • US – Unemployment and Average Hourly Earnings
  • US – Trade Balance





Monday 7th March

  • Japan – Final GDP


Tuesday 8th March

  • China – Trade Balance
  • Eurozone – GDP (revised)


Wednesday 9th March

  • UK – Industrial Production
  • Canada – Bank of Canada monetary policy
  • US – Crude Oil inventories
  • New Zealand – Reserve Bank of New Zealand monetary policy


Thursday 10th March

  • China – CPI & PPI
  • Eurozone – European Central Bank monetary policy
  • US – Weekly Jobless Claims
  • US – JOLTS job openings


Friday 11th March

  • UK – Trade Balance
  • Canada – Unemployment
  • US – University of Michigan Consumer Sentiment (prelim)

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