The Dollar Oultook; Bears Rule The Market

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The Dollar Oultook; Bears Rule The Market

The Dollar Is Set To Move Lower, FOMC Outlook Dovish

The Dollar Index is set to move lower. Last week the daily chart candles broke through support at the top of a previous trading range. This week the index is already confirming resistance at that level and the indications are bearish. Driving the move is the FOMC outlook, an outlook that is turning increasingly dovish. The Fed is expected to cut rates again in September and then again before the end of the year. That is three rate cuts in six months where just last December the market was still expecting more hikes this year.

The risk for traders is this week’s economic calendar. The calendar is full and skewed toward the end of the week which means early week action will be iffy and late week action volatile. Early in the week there is the CPI consumer inflation data. This data is due out on Tuesday and one of the more important in terms of FOMC outlook. We are looking for CPI near 0.2%, a deviation will impact rate cutting expectations. Later in the week, on Thursday, the market is looking for seven major reports including Retail Sales, Empire Manufacturing, Philly Fed MBOS, and the NAHB Home Builders Sentiment Index. Needless to say, there is a lot of risk in the economic data.

The safe-haven Japanese yen is experiencing an updraft in value due to trade war and growth-related fear. The USD/JPY has been moving lower steadily for the last several months and is fast-approaching a one-year low. The low is near 104.75 and will be significant when reached. A bounce from this level is likely to begin with, where it goes from there is questionable. A fall to new lows would be incredibly bearish for the dollar and likely take the USD/JPY down to 102.50 and 100.00.

The Swiss Franc, another safe-haven asset, is also trading at a long-term low. The USD/CHF pair is sitting on potential support at the 0.97 level but the indications are bearish. A move below that level would confirm a deeper move, a move that could go as far as 0.9200 in the near to short-term.

The EUR/USD is moving higher in the near-term but resistance is just above at 1.2919. The indicators are bullish so a test of resistance is likely. The caveat is that price action and the indicators are consistent with weak market movement so reversal is a risk. Longer-term, the EUR/USD will likely move sideways within a range as the FOMC and ECB outlook/actions work against each other. The ECB is expected to enact easing as soon as the next meeting and that will weaken the single-currency.

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Australian Dollar Bears Rule But May Not Turn Up Heat This Week

Fundamental Australian Dollar Forecast: Neutral

  • AUDUSD remains close to 11-year lows
  • Two further interest rate cuts are now fully priced
  • Still, the market may lack cause to hammer the Aussie much harder in the week ahead

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar remains close to this month’s eleven-year lows against its US cousin with overall global risk appetite continuing to drive sentiment towards this most pro-cyclical currency.

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There were some bright spots for the Aussie last week. News that the US will delay imposing further tariffs on some Chinese goods gave global investor sentiment a lift, as did reports that Chinese negotiators will be heading for Washington for trade talks next month.

Strong Labor Numbers Haven’t Changed Interest Rate Forecasts

On the domestic front, it was clear that Australia’s extraordinary job-creation record remained unblemished. July’s official labor-market figures made a mockery of forecasters with 41,00 new jobs on the books rather than the 14,000 expected. There was a solid rise in full-time employment to boot.

However, it is notable that those strong labor numbers did absolutely nothing to market expectations that the record-low 1% Official Cash Rate will slide to just 0.5% by the start of next year. That was the futures curve’s position before the data, it remained so after.

That surprise half-point rate cut from the Reserve Bank of New Zealand this month has seen a solid re-pricing lower of OCR expectations that it is clearly going to take a lot to shift.

No such shift is likely this week, which is a quiet one for economic data. Central bank meeting minutes are due from both the RBA and the US Federal Reserve, but they are unlikely to alter the overwhelming view that rates are headed down in both countries. Australian Purchasing Managers Index figures are coming up too. They’ll attract plenty of investor attention but, again, won’t change the backdrop.

Keep an Eye on Jackson Hole

The Australian Dollar will be left as usual then to the ebb and flow of the risk trade. The risk trade in turn will depend on hard-to-predict headline news. There will also no doubt be plenty of focus on the Kansas City Fed’s annual Jackson Hole central bankers’ fest. That kicks off on Thursday with RBA Governor Philip Lowe saving his speech until Saturday.

In short then it’s hard to get bullish about an Australian Dollar so bereft of domestic monetary policy support, but the risk trade could yet lend it some support for as long as there are clear signs that Beijing and Washington intend to keep talking on trade. Therefore, it’s a neutral call this week.

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets . There’s also a Bitcoin guide . Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free .

— Written by David Cottle, DailyFX Research

F ollow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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