The US dollar continued building on its gains as currency and commodity markets sold off aggressively in favour of the dollar after the Fed raised interest rates last week.
As widely expected, the quarter-point increase in the Fed funds rate to 0.75 per cent on Wednesday provoked an exaggerated sell-off across the board, despite the markets having already priced in a more than 90 per cent probability of a rate rise.
It was the Fed’s hawkish stance regarding the outlook for interest rates that perhaps lent weight to a more bullish US dollar.
In its projections, the Fed Open Market Committee (FOMC) raised expectations across the board: with drops in the median unemployment rate to 4.5 per cent vs 4.6 per cent, GDP growth at 2.1 per cent vs 2 per cent previously and median inflation at 1.9 per cent vs 1.9 per cent expected.
Perhaps the biggest surprise in the projections was that the FOMC tabbed three additional rate hikes for next year, up from the two predicted back in September. The Fed’s shift towards a more inflation-centric policy places more importance on upcoming US inflation data.
Currency crosses on Dubai Gold & Commodities Exchange reversed following the FOMC announcement, with the euro hitting 2003 lows at US$1.0365. Coupled with a bullish dollar, the underlying fundamentals dogging the euro zone continue to cast doubts on growth prospects for next year.
Although Mario Draghi, the president of the ECB, held rates unchanged at the central bank’s December meetings, the extension of its bond purchase programme from April 2017 to the end of December 2017 would further solidify the bearish view on the economic situation in the euro zone. Although we have noticed slight bounces since last week’s closing, we expect the bearish sentiment to continue in the euro going forward.
Expect another stern test of the 2003 lows at $1.0365 before the end of the year, a break of which would open the door to parity levels in the upcoming quarter.
The British pound is expected to also trend lower against the greenback in the weeks ahead. The sterling went through a nice recovery as a result of the parliamentary vote at the end of November, but if anything it was a relief rally.
Following the FOMC rate decision, the pound retested the channel between $1.2350-1.2400 on DGCX which represents a good support level. We expect such levels to hold through the end of the year, particularly with a stronger UK GDP reading due out this Thursday.
Barring any surprises in this figure, upside resistance should hold at $1.2530 through the end of the year. The UK figures have been surprisingly good following June’s Brexit’s vote. However, we expect the slowdown to catch up, which should continue to see the British pound trend lower through the first quarter of 2017.
Gold, which could end up as the biggest loser of the fourth quarter, was down more than 13 per cent since the beginning of October before finding support at $1,122.
Gold remains suspect going forward, with the US central bank in the middle of a hiking cycle prospects for the metal will remain under pressure.
And finally, West Texas Crude Oil consolidated above $50 following optimism from the recent cuts at the Opec meeting. Expect further consolidation in the current channels, support would need to hold at $49.50 levels before considering entering any long positions.
With the holiday period around the corner, expect highly illiquid market conditions to the end of December.
Despite the fact that most traders will be making their way for their holidays, some of the key releases we will be watching include US and UK third-quarter GDP readings later this week, expected at 2.3 per cent and 3.3 per cent year-on-year, respectively.
Gaurav Kashyap is the head of futures at Axitrader in Dubai.
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