By Gaurav Kashyap
Forex crosses maintained their ranges through July. After trading between 93.50 and 95.40 during July, the Dollar Index is just 0.15 per cent down on the month. Across the pond, the euro stabilised above 1.16 against the Greenback on the Dubai Gold & Commodities Exchange (DGCX) and was up marginally (0.24 per cent) on the month. DGCX’s British pound contract broke below 1.30 levels before bouncing higher to settle above 1.31 levels and closing the month 0.47 per cent lower.
The week ahead promises to bring back volatility with a packed economic calendar ahead. Some of the key releases to watch out for include Friday’s US Nonfarm Payrolls report along with the US Federal Open Market Committee rate decision on Wednesday and the Bank of England rate decision on Thursday.
If we start with the former, US payrolls were uneven at the last release. While monthly payrolls did come in above 200,000, it was slowing average hourly earnings and a worsening unemployment rate, which pegged back the US dollar. This time around both metrics will continue to be the main driving force behind dollar movement.
On the back of two rate rises already, the FOMC will not be raising at the meeting on Wednesday. They will, however, definitely observe an improving US data docket (especially that monstrous upside beat in the second quarter GDP reading – 4.1 per cent actual versus 2.2 per cent previously). Markets should perceive this as hawkish, which should lend some support to the dollar in the immediate short term and heading to Friday’s report.
Since the start of the summer the Dollar Index has gyrated between 93.50 and 95 levels, consistently bouncing off the lows while finding stiff resistance at the highs. So will next week be the kick-starter of a new dollar trend? I think not. Looking at the performance of the Greenback since June and correlating it to an improving US data docket would show movement only in the immediate short term (intraday). Improving figures see a flurry of dollar buying before settling over the following days. What this signifies is that dollar positioning is evening out until more developments are received from the ongoing trade war theme. Last week when the European Central Bank bowed down to US President Donald Trump, there was good upside movement in the Index and it is my belief that we would see a proper test of the aforementioned levels as this theme matures.
Of course it is important to point out that the impacts of this ongoing trade war will no doubt start to have a negative impact on the US data docket and we will be in a position through August where the deterioration in US figures will finally start to catch up. This will then lend weight to a more bearish bias in the Greenback through the third quarter.
The other headline event that will no doubt see volatility is Thursday’s Bank of England rate decision. Uncertainty could not be higher heading into this month’s meeting. Economically, the bank will have processed a combination of weakening UK metrics, none more so than the most recent slowing inflation data, which showed that prices slowed to a one-year low. And politically, the Monetary Policy Committee will also remain very sensitive to ongoing political developments as UK Prime Minister Theresa May faces a tough Brexit road ahead. Despite these factors, markets are positioning themselves for an increase to 0.75 per cent with an expected voting pattern of seven in favour of an interest rate rise and two in favour of holding.
Other than the Fed, this makes the BoE the other key central bank to increase rates – no other central bank is adopting an aggressive stance towards future rates. Last week, ECB president Mario Draghi, in perhaps his most dovish state, maintained that rates would remain low through 2019 and that expansionary policy measures for the EU were still very much on the table. And earlier this week, the Bank of Japan in its own policy measures pledged to keep rates very low along with maintaining flexibility in its massive on-going quantitative easing programme.
Finally, keep an eye out for gold which continued weakening through the month. While the yellow metal did not fulfil our downside target at 1204 (hitting as low as 1211 on the DGCX), we expect a good test of these levels in the weeks ahead. Other than major deterioration in Middle East geo-politics, we see little else to stimulate gold buying and maintain our bearish view with 1235 levels now a key resistance level on the upside.
The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Securities.