The US dollar continued its bull run last month, closing its fourth consecutive month higher. Since July the Dollar Index, a measure of the value of the dollar against a basket of currencies including the euro, British pound and Canadian dollar, has gained more than 8.92 per cent on improving US fundamentals and the increasing difference in interest rate outlooks between the US economy and its European and Asian counterparts.
This past month was the end of the record six-year quantitative easing programme, during which the Federal Open Market Commission (FOMC) built up a balance sheet in excess of $4.5 trillion. As expected, the FOMC finally brought new monthly asset purchases down to 0, although it will maintain its balance sheet in a bid to control bond supply and maintain its prices and yields.
More important was the FOMC’s outlook on future US interest rates. Despite an improving labour market and moderate US growth, it agreed to keep rates low for a considerable amount of time, a slightly more hawkish standpoint than expected.
We fully expect another look at US rates come summertime of next year. As we have maintained, we expect the US dollar to benefit from this sentiment through the end of the year – and we continue to watch for the key figures on the US economic calendar this month, such as the monthly US non-farm payrolls and US GDP to continue lending support to US dollar prospects. Improving numbers will only heighten expectations of a rate hike in the US – and this outlook will lead to large gains in the US dollar against its counterparts as the divergence in outlook between them widens.
The US economy is the only bright spot amid the developed nations – since the start of the record bond purchase programme, unemployment rates have dropped from above 10 per cent to 5.9 per cent, while annualised GDP growth sits at 3.5 per cent, well above the developed world’s average 2 per cent for this year. Inflation inches closer to Fed targets of 2 per cent and deflation is not a threat as it is in Europe.
Because of these differences, the dollar will continue to gain at the expense of the euro, the Japanese yen and commodities such as gold. With the dollar index sitting above 87, the next target for the gauge sits at four-year highs of 88.7, and we expect this target to be reached before the close of this year.
With the recent moves in the greenback, gold has tanked more than 2.9 per cent in the past month to smash through the 100-month moving average, which now sits as an upside resistance in the metal. We can expect continued pressure on gold prices as inflows into the US dollar continue, and we expect the metal to close this year below $1,200 a troy ounce.
The European Central Bank is set to convene this week to discuss euro forecasts, and although we do not expect the president, Mario Draghi, to introduce new measures or further rate cuts, we could expect him to announce smaller purchases of private and public debt in a bid to control borrowing costs.
Unfortunately the data flow from the euro zone has not improved in the past month and the slump in the euro is set to continue. With the euro-dollar rate shedding about 0.8 per cent last month, we expect further downsides as the fundamental picture continues to deteriorate. The next target remains 1.22, which is the 200-month moving average. Although a bit ambitious, we expect a strong run towards this target through the end of the year.
Gaurav Kashyap is the head of futures at Alpari Middle East
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