Market analysis: Volatility to persist until US Fed meeting

Markets have almost fully an interest-rate hike into the US dollar. Tyrone Siu / Reuters

Currency and commodity markets have remained range- bound so far this month with a dollar bias. The US dollar staged a modest recovery through the beginning of the month but was quick to pare its gains by the end of trading last week.

With attention turning to the US Federal Reserve and its decision on interest rates, expected on March 15, Bloomberg estimates a hike probability at 94 per cent, up from 40 per cent previously. The hawkish sentiment took the US dollar index upwards to 102.27. The gauge stood at 101.58 in trading yesterday.

On the Dubai Gold & Commodities Exchange (DGCX), the British pound slipped to six-week lows at 1.2219 against the greenback, while gold also fell 1.85 per cent to US$1,230 levels through to the beginning of March.

With eyes on the Fed meeting at the end of next week, markets have almost fully priced in a hike. According to the Chicago Mercantile Exchange Group’s FedWatch Tool the chances of a hike by 75 to 100 basis points sits at 79.9 per cent, while a hike of 50 to 75 basis points stands at 20.3 per cent.

The recent run of US data would suggest the figures are with the Fed – inflation is growing, durable goods and earnings have shown improvement.

With a relatively light economic calendar this week, the feature will be this Friday’s nonfarm payrolls.

February payrolls are expected to show gains of 190,000 new jobs in the headline number, with the overall unemployment rate expected to come in at 4.7 per cent.

I will closely watch the average hourly earnings, a key indicator of price growth, which is expected to improve by 0.3 per cent. With the recent run of weekly jobless claims coming in at monthly lows, I do not foresee any major downside surprises in the report and would expect to see another rally in the greenback if the gains are in excess of 200,000.

This could be the last final big push in the dollar rally before the federal open market committee (FOMC) convenes next Wednesday. Considering this, I maintain our upward resistance in the dollar index at 103.81 followed by 106.45.

While the rate hike is largely priced in, a move to the latter level may be all too ambitious as I expect to see some weakness in the dollar following confirmation of the rate hike and this could result in the US Dollar Index testing support at 99 levels before the end of March once sentiment settles down.

The Australian dollar has also been under pressure following the recent gains in the greenback.

With the Reserve Bank of Australia likely to keep rates unchanged at 1.5 per cent this morning I expect some further weakness in the A$ to $ cross in the lead-up to the Federal Reserve’s decision next week. Downside support would fall at 0.740 levels with upsides capped at 0.775 going forward.

Also due this week is the Euro­pean Central Bank’s rate decision. I do not foresee any surprises when ECB president Mario Draghi addresses the media. The euro has gone through a slight renaissance against the dollar – up 0.56 per cent on the month – and upsides would be capped at 1.07 in this current move.

Gold also remains volatile and susceptible as a result of further strength in the dollar index. Almost 1 per cent lower on the month, gold could weaken to $1,180 before the end of this month.

Crude oil has also turned towards 2017 lows. DGCX’s March West Texas Intermediate contract has slipped below $53 levels. While the downsides in crude may be limited, I maintain my view to trigger long entries between $50.50 and $51 levels going forward.

With trading conditions expected to remain highly volatile, it would make sense to trigger fresh positions only after the FOMC decision on March 15.

Gaurav Kashyap is a forex trader based in Dubai

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