The US dollar was weaker in January, with the US Dollar Index, a value of the currency against a basket of major currencies, dropping 3.23 per cent on the month.
It was a sharp reversal for the greenback, following three consecutive months of higher closings, in which the index moved from 95.44 to 102.29. While the theme in the latter part of last year was dominated by Federal Reserve interest rate policy, culminating in the eventual rate hike in December, markets have now turned their attention squarely to Washington and upcoming US policy.
President Donald Trump has been outspoken on the value of the dollar, calling out its strength in comments to The Wall Street Journal in which he said the dollar was already "too strong".
A large part of Mr Trump’s plans hinge on bringing manufacturing jobs back to the US and going head-on with exporters such as China and trading partners such as Mexico to ramp up US exports and reduce the overall US trade deficit. Top Trump advisers even took aim at Europe, accusing Germany of unfair trade advantages via a “grossly undervalued euro”.
Mr Trump’s mercantilist mentality opens the door to potential trade wars with many of its current trading partners and this will keep the dollar under pressure going forward.
In the immediate short term, initial support in the US Dollar Index falls at 99.19 followed by a longer-term support level at 95.91 levels. Upsides would be capped at 103.81 going forward.
Unlike 2016, the US data docket will not be as influential as Mr Trump’s in the initial parts of 2017 – the most recent FOMC rate decision from last week completely went under the radar. Adopting a rather dovish tone as a result of a softening of US data headlined by a weaker US GDP and supported by weaker fourth-quarter consumer spending, the Fed will adopt a wait-and-see approach through the year – and its focus will hinge more on inflation expectations.
In its most recent meeting, the Fed said that “market-based inflation gauges remain low”, while in December it maintained that “measures have moved up considerably”. Clearly inflation figures are going to be in focus for the Fed. While many expect a minimum of three rate hikes this year, it seems realistic to assume a maximum of two in 2017, with the Fed slashing probabilities of a rate hike through each month of the year.
Even the most recent payrolls did little to spark a dollar rally – January payrolls showed that 227,000 new jobs were added, well above the expected 175,000. While the overall unemployment rate weakened to 4.8 per cent, this was on the back of a stronger participation rate, which increased to 62.9 per cent on the month. It was the average weekly earnings in January that weighed on sentiment – data showed that earnings dropped to 0.1 per cent Act v 0.3 per cent Exp / 0.4 per cent Prev. Clearly an indicator of price pressure, markets sold the dollar on a further expected dovish Fed.
The euro broke through several key resistance levels against the greenback in its run to 1.08 levels on the Dubai Gold & Commodities Exchange in January. While it may be too early to suggest a reversal in the overall trend, we adopt a neutral view in EURUSD in the month ahead. We will watch for resistance at 1.0860 with support coming in at 1.0515 levels.
The British pound also remains in range, and we adopt a neutral bias in GBPUSD in the month ahead. After testing monthly highs at 1.27 against the greenback on DGCX, the pound has retraced below 1.25 levels at the time of writing. We see near-term support at 1.23 on DGCX with upsides capped at 1.27.
Perhaps the safest trade at the moment remains in DGCX’s West Texas Intermediary contract. With resistance coming in at US$54.20 levels, look to build long positions following a correction to $50.50-$51.00.
Gaurav Kashyap is an FX trader based in Dubai.
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