Wednesday, August 1, 2018

Can the Dollar continue to rally? It all depends on the Fed

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks
  • Federal Reserve

MORNING BRIEFING

The Federal Reserve's meeting on monetary policy will be the key event of the day today and even though some expect it to be almost a non-event, we beg to differ. The US Dollar is well bid going into the meeting with the currency posting gains across the board. At the same time, news that US and China want to restart discussions in an attempt to end the trade dispute between them is dampening global risks and fuels risk appetite in equities - but not currencies.

Starting with the Fed meeting, the US central bank is concluding its 2-day meeting today and it will announce its decision on interest rates and provide fresh forward guidance. It's clear that the Fed will not hike interest rates at this stage and even though this is already priced in with the Dollar on the rise, we think there's more room for the greenback to gain. The US economy has been performing well and another rate hike next month is almost guaranteed but depending on how bullish the accompanying statement is, it will increase the odds of yet another move this year. This will keep the Fed at the forefront of monetary tightening on a global scale and the catalyst for the Dollar to respond in kind.

Furthermore, a hawkish tone will hint on another strong month in the labor market ahead of Friday's NFPs report. The Dollar/Yen is a prime candidate for further gains with the pair trading just shy of 112 this morning and should the Fed reaffirm its positive stance it could drive prices all the way to 113. Having said that, in the off chance that the Fed statement stresses concerns about global growth in the face of trade disputes, then we should look for the Dollar to weaken swiftly, especially against the commodity currencies.

Turning to Europe, the Euro and the Pound are in the red this morning succumbing to Dollar's surge ahead of the FOMC meeting and the NFPs report on Friday. We expect the Dollar to dominate the price action today and this should keep both European majors under pressure but the rest of the week might turn out different for the two currencies. The Euro has little reason to recover at this stage so a continuation towards 1.1620 is likely but for Sterling the BoE meeting tomorrow could act as a lifeline.

The Bank of England is widely expected to raise interest rates tomorrow and that has allowed the Pound to remain relatively afloat versus the Dollar, dropping only 60 pips from yesterday's highs. So even though an extension of these losses could be seen today, the combination of a strong support around the 1.3080 area and expectations for a BoE move tomorrow could keep the Pound supported. Looking ahead, if the Bank of England pulls the trigger tomorrow a reversal towards 1.32 is rather likely.

Commodities aligned their trajectories overnight with Gold joining Oil to trade to the downside. Earlier in the day, the yellow metal spiked higher when news that the US and China are willing to restart talks on trade relations hit the wires dampening geopolitical risks. However, Dollar's momentum was too strong for Gold resulting in a reversal of these gains and the short-term bias points lower again. Oil was not able to stay above $70 after the API inventories surprised to the upside; the recent uptrend suggests that the demand is still there but the short-term price action points towards a consolidation between $67 and $70 per barrel.

Equities ended the day in positive territory as news that the US and China want to work together to end their trade spat elevated investors' optimism on the back of the positive earnings season. The Asian markets are trading mixed this morning but the European and US futures are trending higher. This is an interesting week for stock traders as they have to gauge the conflicting forces of continued tightening on almost a global scale and sustained growth, mainly in the US and Europe. We think that a lack of direction will remain the theme in the stock markets up until the end of the week with investors trying to play the ranges in the equity indices.

MARKET EVENTS TO WATCH

  • UK PMI Manufacturing - 12.30pm
  • U.S. Crude Oil Inventories - 6.30pm
  • Fed Rate Decision - 10pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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