Market analysis: Greenback shines as Fed decision draws closer

An expected rate hike next month has world markets in a holding pattern – but the US dollar is still strong.

Janet Yellen, the chairwoman the US Federal Reserve, left, speaks with Mario Draghi, the president of the European Central Bank. The ECB, as most other central banks, will look at its policies once thShow more

With so much event risk foreseen as a result of the Federal Open Market Committee’s (FOMC) expected rate hike next month, markets are in a holding pattern, as are global central banks that are awaiting policy – or inaction from the Federal Reserve – before proceeding with their own courses of action. Having said this, the US dollar continues to maintain its upward momentum.

The US Dollar Index, a measure of the value of the dollar against a basket of major currencies, gained more than 3 per cent last month to reach eight-month highs at 99.00. With the interest rate decision drawing closer, markets will continue to take a liking to the dollar and the bull run still has some momentum for when the rate hike eventually materialises.

The US economic calendar will continue to maintain the status quo – next up is the November FOMC meeting today and tomorrow, in which no rate hike is expected. Markets are currently pricing in a 92 per cent chance of holding rates, while this decreases to 26 per cent for next month’s meeting. While we do not expect action, the Fed chairwoman Janet Yellen’s comments will be closely scrutinised for more insights over the likelihood of a rate hike next month. After the November FOMC meeting comes payroll data from last month, and this is due out this Friday.

Payroll data is expected to come in at 175,000 jobs added, with the unemployment rate expected to come in at 4.9 per cent. These expectations are largely in line with the quarterly averages of the past three months and unless there is a large miss on either side, these numbers are unlikely to change market’s wait-and-watch approach.

The data flow from the early part of this month is unlikely to change current market trends. Currency and commodity markets should continue in their current ranges through to early next month. Having said this, short-term opportunities remain in these current ranges, with a dollar bias.

The euro has remained anaemic against the greenback and will have stiff resistance above US$1.10 levels, with another test of $1.085 levels likely in the weeks ahead.

Fundamentally, talks of Mario Draghi easing seem to have been premature and have weighed down euro prospects. The ECB, as most other central banks, will look at its policies once the US FOMC triggers its own action. Expect further weakness in euro crosses. The British pound continues to also remain under pressure going forward, however, the current ranges will hold.

Upsides on the Dubai Gold and Commodities Exchange (DGCX) pound contract should remain capped at $1.235 levels, with a downside test of $1.205 likely.

The recent GDP data from the UK came in at 0.5 per cent for the third quarter, besting expectations of 0.3 per cent, but well below the 0.7 per cent growth rate experienced in the second quarter.

The effects of the Brexit vote will continue to drag down UK figures in upcoming data releases. Expect to see another test of $1.18 levels towards the end of this year.

And finally, crude oil peaked at $52 per barrel on the DGCX last month, on continued optimism of an Opec production cut during its next meeting, on November 30. Expectations have cooled with the WTI crude contract retracing about 10 per cent of its 15-month highs to the current $48 levels. It is still not clear if the production cut will materialise this month, so we await further comments from Opec and its key members before triggering further crude positions.

Gaurav Kashyap is the head of futures at Axitrader in Dubai

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