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It is a crucial week ahead for the dollar bulls

As traders return to their desks from their summer break we consider the prospects of the dollar int he coming week. Economic data makes a welcome return to switch focus away from the politics with Non-farm Payrolls topping the agenda. We consider the outlook for major forex, equities and commodities markets.

After months of outperformance, the US dollar has begun to struggle, begging the question, has the medium term dollar bull rally run out of steam? Trade fears have previously been a key driver of dollar strength as Donald Trump has  picked disputes everywhere (Canada, Mexico, the EU, China, Iran, North Korea) with neither friend nor foe escaping his ire. He has played into his “America First” mantra causing significant ripples through global markets. Emerging markets have struggled with supply lines threatened, which has driven a move out of EM currencies and, with the Fed set firm on its tightening course, into the perceived safe haven of the US dollar. You could buy risk-free 10 year Treasuries that yield between 2.8% to 3.0%, or US equities with over 20% earnings growth as a viable alternative to bonds. However, there seems to be a shift in sentiment following slightly more dovish than expected comments from Fed chair Powell at Jackson Hole. Although nothing overly dollar negative, Powell, appeared to hint at gradual hikes ahead. EM currencies (e.g. Turkish Lira, South African Rand, Indonesian Rupiah) underperform on trade fears, but there are serious question marks of the dollar performance against the G4 majors (EUR, JPY, GBP). What was also notable was that on Friday, gold started to be supported on a safe haven flow, something not seen for months, even in the face of a stronger dollar. A hugely long dollar position could now begin to unwind. With strong medium term Dollar Index technical indicators on the wane, are dollar rallies now going to start to fade?

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.