Next week features key decisions from both the US Federal Reserve (on Wednesday) and Bank of Japan (on Thursday).
In the run-up to next week’s central bank decisions, USD/JPY has been rising on a rebounding dollar and falling yen for most of this week. This rise has brought the currency pair up from last week’s spike below the key 108.00 support level up to its current position above the 110.00 level.
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Gold loses out as US stocks hit new highs
North Korea launched another missile test earlier this morning and this was one of its furthest-reaching yet.
However, after an initial knee-jerk reaction, equities bounced back while gold weakened sharply.
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The USD/CAD rise has formed a tentative bear flag chart pattern within a strong downtrend that suggests a possible impending continuation of the longstanding bearish trend for the currency pair.
This bearish trend has been driven in large part by a surging Canadian dollar boosted by an increasingly hawkish Bank of Canada that unexpectedly raised interest rates earlier this month.
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Gold breaks down ahead of key Fed decision
For more than a week, gold has dropped from its new one-year high above $1350 as the dollar has rebounded modestly, bets on a Fed rate hike by the end of this year have increased, and both risk aversion and market volatility remain at exceptional lows.
Much of gold’s short-term directional bias will hinge upon the upcoming FOMC policy decision on Wednesday.
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Dollar could rally sharply on hawkish FOMC
In making their decisions, policymakers at the Fed are likely to take into account last month’s sharper-than-expected rise in CPI inflation, and weigh this against somewhat softer macro pointers elsewhere in the economy.
But with employment remaining healthy and inflation being so close to its target, the Fed may get the market ready for another rate rise in December and also provide a plan for balance sheet normalisation.
In other words, the Fed may be more hawkish than dovish at this meeting. Get the full story http://on.forex.com/2xmNzWZ
chart source: eSignal and FOREX.com
FOMC Recap – Hawkish-Leaning Fed Eases Dollar Pressure
The Federal Open Market Committee issued its interest rate decision, monetary policy statement, and economic projections, followed by a closely-watched press conference on Wednesday afternoon. As widely expected, the target range for the Fed Funds rate remained unchanged at 1.00%-1.25%.
However, aspects of the release, including the statement, dot plot, and economic projections, leaned distinctly towards a more hawkish stance, easing pressure on the US dollar and intensifying pressure on gold. Get the full story http://on.forex.com/2hk1QKS
EUR/USD maintains bullish trend ahead of German elections
The likeliest scenario this Sunday will be a clear win by the CDU, with Merkel continuing on as Chancellor and forming a probable coalition government that excludes the AfD.
Again, however, the risk of the AfD gaining more prominence and power is significant, and could negatively impact the high-flying euro if the party wins substantially more votes on Sunday than expected.
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The markets’ initial reaction to the outcome of the German federal election has been negative. EUR/JPY could be on the verge of a correction. Get the full story http://on.forex.com/2wO4BP8
chart source: eSignal and FOREX.com
Stocks struggle to sustain gains as risk of correction grows
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chart source: eSignal and FOREX.com
Undermined by dollar, could gold and silver shine again? Get the full story http://on.forex.com/2xwo86h
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EUR/USD’s six month bull run may end but trend may not. Get the full story http://on.forex.com/2yJreBG
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Sunday’s “illegal” independence referendum in Catalonia saw just under 90% of the people vote in favour of the region seceding from Spain, even if not all were allowed to vote. There was another terrorist attack in France, where a man stabbed two women outside of Marseille’s main train station. Overnight another terrorist attack in Las Vegas has left at least 50 people killed and scores injured in a mass shooting at a concert.
North Korean tensions rose again after US President Donald Trump in a tweet described the talks between his foreign minister Rex Tillerson and North Korea as a “waste of time.” Yet, the global equity markets have hardly reacted to any of these events in a meaningful way and there’s been very little interest in gold, for otherwise its price should have surely been higher. Get the full story http://on.forex.com/2xUCI7m
Chart source: eSignal and FOREX.com
Aside from a European Central Bank that has been reluctant in addressing QE tapering, recent political risks have been the most salient factors pressuring the euro lately. Despite a victory for incumbent Chancellor Angela Merkel and her party, last week’s German federal election saw the unexpected rise to prominence of a right-wing, nationalist and anti-EU group in the AfD. This creates a potential threat to the euro within the Eurozone’s largest economy, and indeed hit the shared currency significantly after the results of the election were known.
Most recently, this past weekend saw a heavily-contested referendum to vote on independence for Spain’s Catalonia region. While the Spanish federal government deemed this vote illegal, around 90% of Catalonian citizens who were able to vote, voted for independence from Spain. This also hit the euro on Monday, but the lasting implications of these vote results are likely to be muted, as the question of Catalonian independence should have a limited impact, if any, on the future viability of the European Union and Eurozone.
Perhaps the most important factor weighing on EUR/USD is that of US dollar strength. Get the full story http://on.forex.com/2xbdSvY
NFP Preview: Will a US jobs beat on low expectations sustain the dollar recovery?
Jobs Created and Potential USD Reaction:
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EUR/USD hits key level after Catalonia suspended independence declaration. Get the full story http://on.forex.com/2ygd4cN
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DAX hits new record at 13K
Favourable market conditions, relief on the back of a reduced threat of Catalonian secession from Spain and record low interest rates and QE combined have all helped to lift the German DAX to a new record level of 13,000 today. Get full story http://on.forex.com/2kJn6yx
Chart source: eSignal and FOREX.com
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Catalonia uncertainty weighs on euro. Get full story http://on.forex.com/2ysSdDB
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USD/CHF about to rip?
The USD/CHF remains fundamentally supported with the US Federal Reserve being the most hawkish central bank out there, while the Swiss National Bank being among the most dovish.
The perceived safe haven Swiss franc is currently also undermined by rising equity prices around the globe, which is also undermining gold prices. And with the Dollar Index potentially on the verge of a comeback after its decline since the turn of the year, we are now expecting to see the USD/CHF push higher.
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The Week Ahead: Euro and Canadian Dollar in Focus
by James Chen, CMT
In an otherwise relatively light week for global economic releases, the week ahead will be dominated by two major central bank decisions – the Bank of Canada (BoC) on Wednesday and the European Central Bank (ECB) on Thursday. Clearly, the Canadian dollar and the euro will be the major currencies in focus as markets assess whether the BoC will continue its policy path to higher interest rates and if the ECB will provide concrete details on plans to taper its massive economic stimulus program. Neither central bank is expected to raise interest rates next week, but any indications as to how their policy paths may unfold in coming months will have substantial impacts on their respective currencies.
Bank of Canada
A surprisingly hawkish Bank of Canada raised interest rates back-to-back in July and September, helping to fuel and extend a Canadian dollar rally and USD/CAD downtrend within the third quarter of this year. Starting in early September, however, as the battered US dollar began to rebound from multi-year lows, the Canadian dollar lost ground against the greenback. The oversold US dollar was driven higher due in part to rising expectations of a Federal Reserve interest rate hike by the end of the year.
Recent signs have been pointing to the likelihood that the BoC may become more dovish going forward. Late last month, well after the September rate hike, Bank of Canada Governor Stephen Poloz stated in a speech that there would be “no predetermined path for interest rates,” and then went on to warn that “monetary policy will be particularly data-dependent in these circumstances and, as always, we could still be surprised in either direction.” Those comments appeared to back off from the central bank’s previously hawkish stance.
On Friday, key Canadian inflation and retail sales data were released that were significantly lower than expected. The monthly Consumer Price Index for September came in at +0.2% against a prior consensus forecast of +0.3%. In addition, both retail sales and core retail sales (excluding automobiles) for August were substantially negative against positive expectations. Retail sales came in at -0.3% versus +0.5% expected, while core retail sales suffered a sizable -0.7% loss versus +0.3% expected. These weak inflation and retail sales numbers clearly do not bode well for further near-term policy tightening by the data-dependent BoC. As a result, Friday saw the Canadian dollar fall sharply, which was exacerbated by a US dollar surge. Pressure on the Canadian dollar is likely to continue if the BoC indeed strikes a dovish tone next week, and especially if the US dollar and hawkish Fed expectations both remain supported.
European Central Bank
The ECB policy decision and press conference are set for Thursday. Prior to the ECB meeting, key services and manufacturing PMI data for France, Germany, and the Eurozone as a whole, will be released on Tuesday.
Although an interest rate increase is certainly not expected from the ECB next week, euro traders will be paying extremely close attention to any indications by ECB President Mario Draghi regarding the central bank’s plans to taper its monthly asset purchases. Markets are expecting the ECB to announce that it will begin reducing those purchases starting in January, down substantially from the current €60 billion/month. The key questions remain, however, as to the specific magnitude of that reduction as well as the planned duration of the longstanding asset purchase program. The ECB will likely be wary about sounding too hawkish or aggressive in its tapering plans, as any such talk or action would undesirably exacerbate euro strength.
The euro has generally been trading in a range against the US dollar for the past three weeks. Prior to this range trading, the euro saw a prolonged period of strength since the beginning of the year, particularly against the US dollar. The ECB decision on Thursday should help dictate if and in what direction the euro may break the current trading range. One likely scenario is that the central bank may advocate a more gradual tapering process over a longer period of time than expected, in part to avoid further euro strengthening. If this is the case, the euro could take a significant hit and EUR/USD could stumble, especially if Fed-driven dollar support continues.
