Fundamental Forecast for USD: Neutral
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The US Dollar is looking to cap-off a second week of indecisive price action: After last week saw a Doji print around the 90.00 level on DXY, this week’s bar is currently showing a spinning top formation around the same price. Despite this back-and-forth, it was actually a rather interesting week of short-term movement in the Greenback. As we opened on Sunday, USD weakness continued to show, extending the declines that had started on the prior Thursday around ‘Tariff talk’. That weakness ran into the early-US session on Tuesday morning, at which point a bit of support began to show around 89.40. Prices ran up to test the 90.00 level, but as we’ve seen in multiple instances over the past six weeks, bullish motivation started to wane on tests above that level and prices pulled back after the Non-Farm Payrolls report.
US Dollar Price Chart: Four-Hour Time-Frame, Back to 90.00 as Range Expands
Chart prepared by James Stanley
The big USD-driver for this week was Non-Farm Payrolls, released on Friday to a strong print of +313k versus an expectation of +205k. Normally, a beat of this nature would really grab attention from Dollar bulls attempting to get in-front of higher probabilities for rate hikes in the near-future. And to be sure, we did see those nearby rate expectations firm, as probabilities for a hike at the Fed’s March meeting have moved up to 88.8% via CME Fedwatch. But what didn’t’ come along with that move was the US Dollar, as traders merely used this morning’s bump-higher to sell DXY right back down to 90.00. A logical explanation for this weakness was the lagging Average Hourly Earnings in this morning’s report, coming in at 2.6% v/s a 2.8% expectation; which runs in stark contrast to last month’s surprising 2.9% number that was revised-down to 2.8% this morning. But – US Dollar weakness has been a fairly pervasive theme for over a year now, so there’s likely another explanation of what’s helping to keep the US Dollar so weak on a longer-term, bigger-picture basis.
US Dollar Price Chart via ‘DXY’: Down as Much as 15% From 2017 High to 2018 Low
Chart prepared by James Stanley
At this point, markets are pricing in a 34.2% chance of a full four rate hikes out of the Fed this year, with a 73.3% chance of three hikes in 2018. This runs in stark contrast to other Central Banks around the world, with both the European Central Bank and the Bank of Japan both avoiding the topic of rate hikes altogether at this week’s rate decisions, continuing with their current full-throttle QE outlays.
Longer-Term USD Weakness
Spot FX markets are forward-looking, just like bond markets or equity markets. Market participants aren’t usually going to wait around for a rate hike to begin pricing that in because, frankly, it could already be too late to actually trade the move by the time the hike is announced. So, the fact that we’ve seen a US Dollar that’s lost as much as 15% from last year’s high continuing to sell-off, even as the Fed is one of the only games in town on the rate hike front, and this would point to the fact that something else is going on here as market participants are and have been adjusting to the current backdrop.
Last week we looked at a possible explanation for this when we discussed US fiscal policy. The US government is expanding at a fast pace, with $500 Billion in extra spending over the next couple of years along with an extra $1 Trillion in tax cuts over the next ten. The US government runs at a deficit; so to fund these initiatives the Treasury department is going to need to raise funds through debt auctions. These debt auctions will increase the supply of Treasuries, which will pull prices-lower, all factors held equal (supply/demand equilibrium). The lower prices on Treasuries to take into account the new additional supply would also bring along higher yields, much as we’ve seen so far throughout 2018.
Paul Tudor Jones, the legendary and famed trader and Hedge Fund manager made a comment earlier in February in which he said: “If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal.” This will likely remain as a pertinent theme across global markets in the near-term, and this will probably continue to impact the US Dollar as demand for US Treasuries and, in-turn, demand for the US Dollar lags as driven by US fiscal policy; even in the face of tighter monetary conditions.
US Treasury Yield on 10-Year Notes: Monthly Chart, Fast Approaching Seven-Year High 3.04%
Chart prepared by James Stanley
This is relevant because it’s likely a key factor behind the US Dollar’s pervasive weakness, even as the Fed is one of the few developed Central Banks actively tightening rates. This is also something that could keep pressure on the Greenback, particularly as there are other Central Banks still actively supporting their respective bond markets via QE programs in both Europe and Japan. If you’re at a hedge fund or if you’re trading bonds, why take the risks of standing on a slippery slope in US Treasuries when much more optimal conditions are available overseas; at least for now? This also helps to explain why the Euro has been so strong over the past year despite the fact that Yields across the continent remain at extremely low levels.
Next Week’s Calendar: High-Impact US Data on Tuesday, Wednesday and Friday
The big item out of the US next week are February inflation figures, set to be released on Tuesday morning. The expectation is for 2.2% annualized on the headline number to go along with 1.8% for Core inflation. Retail sales figures are released the following morning, currently carrying an expectation for a .4% print; and the week closes with U of M Consumer Sentiment. These can each bring some baring on near-term price action, particularly the inflation report as the week after brings the March FOMC rate decision.
DailyFX Economic Calendar: High-Impact US Items for Week of March 12, 2018
Chart prepared by James Stanley
Next Week’s Forecast
The fundamental forecast for next week in the US Dollar will be set to neutral. While the longer-term bearish trend remains, along with the possibility for more, the flares of strength that have shown over the past two weeks should not be ignored. Next week brings inflation figures, and the week after that brings the March FOMC rate decision with that widely-expected rate hike. That rate decision will be new Fed Chair Jerome Powell’s first at the bank, so this would be a good time to get a read on the new head of the Fed. This could also be an environment ripe for a squeeze for USD-shorts, and this may be an opportune time to wait for rips in order to sell at higher prices.
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
— Written by James Stanley, Strategist for DailyFX.com
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Top Tier Data, Risk Aversion Portend Volatility
Financial markets may face breakneck volatility as a steady stream of heavy-duty scheduled event risk is compounded by wild swings in sentiment.
The US Dollar may continue to push higher as haven demand amid deteriorating market sentiment takes over from Fed policy bets as the catalyst du jour.
There is an argument to be made that Sterling has suffered enough and that most, if not all, of the bad economic backdrop has been priced in. But is next week the week to have that argument?
The Australian Dollar faces a week full of US economic data, but much shorter of domestic numbers. This could see USD back in the ascendant, if only for lack of AUD-specific impetus.
Chinese Yuan Forecast: Yuan May Benefit from Capital Inflows, Trade Talks and Chinese PMI
Capital inflows could remain high around June 1, when A shares are officially included in MSCI indices; trade talks may solve some discrepancies; PMI gauges could boost the outlook of a sustainable recovery.
Crude oil hit a wall as OPEC and its allies are said to increase production while total US inventories swelled by the most since February.
Equities Forecast: S&P, Dow, DAX & FTSE – A Cautionary Pause Begins to Show
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
Euro Moving Towards Key Support to Curb Persistent Selling
EUR/USD TECHNICAL HIGHLIGHTS:
- EURUSD selling shows no signs of abating, close below Jan 2017 trendline sets up further weakness
- Key risk events on the calendar come in the form of Eurozone inflation and US NFP report
For the intermediate-term fundamental and technical outlook on EUR/USD, check out the recently released DailyFX Quarterly Forecast.
The theme of selling EURUSD has shown no signs of abating with the pair now trading around the mid-1.16 area. Last week saw the trendline dating back to January 2017 offer some mild support on Wednesday, however, another bout of Euro weakness saw the trendline support ultimately breached. A close below the trendline could provide a telling sign that another leg lower will be in store for the pair.
As we look ahead to next week, risk events on the calendar for the Euro will come in the form of the Eurozone inflation and the latest US NFP report. In terms price action, the aforementioned breach of the Jan’17 trendline sets up run in on the 2016 high situated at 1.1616, while a weekly low from November 7th at 1.1553 looks to be pivotal, a break below will likely see an extension of the bear run. Resistance on the topside resides at 1.1709, marking the 38.2% Fibonacci Retracement of the 1.0340-1.2556 rise, alongside 1.1750 (May 24th high).
EURUSD bulls on the longer term may find comfort in the fact that the Relative Strength Index on the daily chart is in oversold territory, which could indicate that the pair may see a modest reversal in the near-term. However, when the pair has previously been in oversold territory the rebound has been mild at best and followed by another wave of selling.
EURUSD CHART: DAILY TIMIE-FRAME (Sep 16-May-18)
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Crude Spills on Saudi’s Proposed Increase, Short-Term Top Likely
Fundamental Forecast for USOIL: Neutral
- The ONE Thing:Saudi turning on the spigots may lead to lower prices, but bullish environment remains. OPEC rhetoric is rightly center stage as oil traded notably weaker toward week’s end. Saudi Arabia’s oil minister, Ali-Falih, said he sees a ‘likely’ oil supply boost in H2 2018.
- Per BHI, U.S. Oil Rig Count rises to 859, US total count at 1059
- Crude Oil Price Forecast: Brent Premium Favors OPEC Induced Volatility
- The technical analysis picture of crude oil shows a sharp pullback off 3-year highs. Chart support comes in for the WTI front-month contract at $67.50/$64.50 per barrel.
Crude had the first weekly decline for the month of May as OPEC’s comments spooked bulls. More oil coming out of Saudi & Russia is helping to narrow a popular futures calendar spread that helped to visualize the bullish support for crude that weakened this week.
Shortage Fears Wane on OPEC+ Rhetoric
Data source: Bloomberg
Seemingly bearish rhetoric took hold of the Oil market causing the price to fall on Friday. Multiple reports came about OPEC, and their allies that are collectively known as OPEC+ as rolling back production cuts. There remains uncertainty about Venezuelan and Iranian supply that has likely supported these comments from OPEC+.
The front-month WTI crude contract broke back below $70 and calendar spreads between December 2018 to December 2019 futures contracts narrowed to the weakest levels in more than a month. The wide spread aligned the move above key resistance levels.
Additionally, owners of oil producer equities are likely not as concerned as an exposed futures traders given that many producers have been locking in high prices through hedging via options.
Crude has nearly erased May’s Gains With ~3.5% Drop Last Week
Data source: Bloomberg. Created by Quasar Elizundia
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Big Pullback on 240-Minute Chart
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The sharp pull-back is seen well with RSI(5) on the four-hour chart. The RSI(5) has hit the lowest point since crude began its impressive ascent from $58/bbl in February to above $72/bbl earlier this week.
Since the news came that Saudi and Russia are considering easing global output cuts, the price dipped aggressively lower. Oil has its first weekly loss for the month on Friday’s nearly 3% loss.
Traders can look to trendline support zone and prior structure support points near $64.50/67.50 as likely support on the pullback. A deeper move below this zone would shift me from neutral to cautiously bearish, but the broader cycle change favoring commodities makes this a difficult view to hold.
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Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday: US Memorial Day
- Monday: Statistics Norway releases quarterly survey on planned investments in the oil industry
- Wednesday (delayed for holiday) 04:30 PM ET: API Weekly Oil Inventories Report
- Thursday (delayed for holiday) 11:00 AM ET: EIA issues weekly US Oil Inventory Report
- Thursday 12-2pm: EIA releases monthly report
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
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Tyler Yell is a Chartered Market Technician. Tyler provides Technical
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