The US dollar remained under pressure through April, dropping to six month lows. The US Dollar Index, a measure of the dollar against a basket of major currencies, slipped to 98.41 amid a host of key developments in the United States. The downside pressure on the greenback has been interesting to say the least.
The strong economic rebound shown in Friday’s US payrolls report couldn’t stem the damage to the dollar. The data showed that 211,000 new jobs were added in April, well above the expected 185,000, while the overall US unemployment rate trumped expectations to drop to 4.4 per cent – a 10-year low. Wage growth, a key driver in inflationary expectations, also reported a bounce back to 0.3 per cent month-on-month in April, up from March’s reading of 0.1 per cent.
Despite the strong data, which followed a hawkish Federal Reserve meeting, dollar longs have remained sluggish. President Donald Trump’s victory over Obamacare in the house of representatives gave optimism to the US equity markets but has pegged back the dollar (Washington working together is seen as a positive, which would be “risk on”, which is always negative for the dollar).
Gauging these factors, we expect the dollar to remain in the current range, between 97.86 and 100.50 levels, in the lead up to June’s FOMC meeting.
Markets are now pricing in a more than 87 per cent chance the Fed triggers it’s second rate hike of 2017 in that June meeting.
The latest Commitment of Traders report from the US Commodity Futures Trading Commission also shows the deteriorating sentiment towards the dollar. British pound short positions have decreased to their lowest levels since June 2016 – it was the week after the June 23 referendum in fact – and euro shorts also fell as a result of large unwinds over the past few weeks. We expect the rebalancing to continue with more of a shift towards longs in the euro.
With Emmanuel Macron’s decisive victory in France’s presidential election on Sunday, and the next major political event taking place in September (elections in Germany), markets will now focus on the European Central Bank and its quantitative-easing policy.
Expectations are rising that a less dovish ECB could hint at a tapering of the current quantitative-easing programme as early as June. Despite the fact that the ECB president, Mario Draghi, has reiterated that its policy stance will remain as accommodative and responsive as need be, European growth has been gaining traction with inflation near the target 2 per cent level. If European data continues to impress through May and June, the ECB may be in a position to navigate away from its references to further rate cuts or increasing easing.
Thursday’s EU economic forecasts will be of particular significance along with first quarter GDP data due on May 16 and euro area inflation data due on May 17. The ECB is keeping a close eye on inflation, which remains the only thorn in turning fully hawkish, and any hints of growth in that CPI reading next week will trigger a fresh round of buying in euros versus the US dollar. Our aforementioned levels in euro-dollar cross remain intact – our upper resistance of $1.1030 levels will remain a strong ceiling going forward while support comes in at $1.0830 levels in the weeks ahead. On Monday it was at $1.0950.
The Bank of England also reconvenes this Thursday, with no major changes excepted in the interest rate or the current quantitative-easing programme. Voting during the last meeting sprung a small surprise, with one member out of the nine calling for a hike. We expect the 1-8 split to continue at Thursday’s meeting. The British pound has not been able to break through our resistance channel between $1.2950 and $1.30 levels and we expect this to hold through the next two weeks. The pound was at $1.2960 on Monday.
And finally, commodities remain under pressure. Gold has sold off more than 3 per cent in the past two weeks and has started to consolidate within a weekly Ichimoku cloud (it gauges momentum). Support remains at $1,210 an ounce with upsides capped at $1,236 going forward. The spot price on Monday was at $1,233 on the Dubai Gold and Commodities Exchange.
Crude also has entered into a bearish bias – West Texas Crude on the DGCX has fallen more than 12 per cent over the past three weeks. We expect $44.30 levels to hold in the weeks leading up to the Opec meeting taking place on May 25. It was trading at $46.17 on Monday.
Gaurav Kashyap is the head of futures at EGM Futures.
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