Markets have made a sharp reversal in short-term sentiment in the US dollar following the Federal Reserve’s rate decision last week.
As widely expected, the Fed did hike the benchmark US lending rate to 1 per cent, but it was the rather dovish undertones of the Fed chairwoman, Janet Yellen, which led to the sharp sell-off in the greenback – it is down 1.5 per cent since the rate announcement.
The Fed also released its economic projections and generally maintained its expectations for GDP, inflation and unemployment, although there were a couple of upward revisions from December’s projections.
But markets looked past these growth projections and instead chose to focus on the rather dovish tone of Mrs Yellen.
She is pushing the government to fully gauge the impact of the proposed tax cuts and government spending the Donald Trump administration has proposed since taking office before committing to future Fed policy.
This non-committal nature has, if anything, extended volatility and kept uncertainty high through the beginning of summer. We already know Mr Trump plans to introduce US$56 billion in additional government spending, primarily towards defence – via his proposed tax cuts and cuts to very popular agencies such as the Environmental Protection Agency and Nasa – but the impact of these moves on the 2017 US growth story is what seems to be keeping the Fed cool on future rate hikes.
Until there is more clarity from Mr Trump’s policy on his proposed tax cuts and future fiscal policy, the Fed will continue to maintain this non-committal tone, which will keep markets trading sideways with no clear trend forming.
Having said this, we maintain a dollar bearish bias in the weeks ahead as the Fed decision continues to hang over markets through this week. The euro, which was entrenched below 1.06 levels for most of the past month, has broken through the channel and will target 1.0850 levels before the end of this month.
Fundamentally, the election results from the Netherlands, in which anti-EU nationalist Geert Wilders was defeated, provided renewed optimism for the region. While the Netherlands makes up a very tiny portion of the euro zone (3.3 per cent in population and 4.7 per cent of EU GDP), the election was a EU litmus test, a symbolic break in the growing pockets of global nationalism.
This sentiment is particularly timely in the lead-up to the French elections, which will begin next month. Of course, all eyes will be on Marine Le Pen and the performance of her National Front party. Political pundits expect a Le Pen victory in the first round with a projected loss to favourite centrist candidate Emmanuel Macron in the second round. But if history has taught the markets anything – the Brexit vote and Mr Trump’s victory – then anything is possible next month.
Also due at the end of March is the formal triggering of Article 50 for the UK to exit the EU, with many expecting the proceedings to begin on March 27.
Despite the fact that markets have been digesting the vote for the past nine months (the pound has depreciated 15 per cent against the dollar), we expect the pound to encounter a fresh bout of bearishness through these proceedings. The Dubai Gold & Commodities Exchange (DGCX) British Pound contract could experience another test of 1.2080 levels followed by 1.1990 through the end of March and beginning of April.
Gold has also gone through a mini-renaissance following the dovish Fed rate decision. The precious metal reversed sentiment and buying support has been taking it to two-week highs. At the time of writing, gold was up at $1,230 an ounce on the DGCX. Technically, gold has entered a no-trade zone, however you could see upsides towards $1,249 as a result of a combination of dollar weakness and European uncertainty explained above.
And finally, crude oil continues to remain anaemic despite a weaker US dollar – in the past month alone DGCX’s West Texas Intermediary crude contract has sold off 11 per cent. Fundamental data has piled pressure on crude oil. Since January 11, US crude inventories have grown by 49.14 million barrels versus expectations of build-ups of 23.04 million barrels, and the US rig count continues to show expansion in the number of rigs drilling for oil.
Expect the building supply glut and the bearish sentiment to keep crude prices under pressure through the end of March – $47.18 provides initial support, following medium-term support at $44.20 levels.
Gaurav Kashyap is the head of trading at EGM Futures DMCC.
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