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
GBP/USD – The psychological level at $1.4000 is now crucial
USD/JPY – Resistance at 113.50 now with pressure on 110.98
Gold – Bulls remain in control but for how long?
Oil – Long term bearish arguments are being broken
Indices – Correlation with oil still has a role to play
Tuesday 1st March
Wednesday 2nd March
Thursday 3rd March
Friday 4th March
Monday 7th March
Tuesday 8th March
Wednesday 9th March
Thursday 10th March
Friday 11th March
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