Now that the US presidential election has been settled, markets will turn their attention to the US economic calendar headlined by the Federal Reserve’s interest rate decision on December 13 and 14.
Expectations are mounting for a US rate hike, which now sit at 81.1 per cent. Fed chairwoman Janet Yellen has been insistent that the political climate has no bearing on the central bank’s decision and thus the upcoming three weeks of US data will be key in driving the case home for the rate hike.
Attention will immediately turn to Thursday, when the US inflationary figure is due along with Ms Yellen’s testimony to the US Congress. The former is expected to show that short-term inflation growing to 0.4 per cent month-on-month with the longer-term inflation reading at 1.6 per cent year-on-year.
Mrs Yellen’s testimony to Congress will be closely monitored for any new rhetoric regarding the Fed’s view on the US economy, and as a result we expect heightened levels of volatility to drive markets through the next two weeks.
Judging by the comments coming from the Fed during their last meeting in which they stated that the need for a rate hike in December has heightened, the US dollar will be in demand.
While all the Fed talk has supported the dollar, we expect the momentum to continue in the weeks ahead.
The Dollar Index, a measure of the US currency against a basket of major currencies, is currently trading at 99.70 at and we expect a strong test of the 13-year highs of 100.38 through the weeks ahead. While the dollar may take a breather following the announcement, expect the greenback to maintain its bullish bias through the early part of December.
This will continue to pile the pressure on asset classes against the dollar – particularly the euro and gold. The euro has already approached yearly lows against the greenback – at the time of writing, the cross was trading at 1.0788 on the Dubai Gold & Commodities Exchange (DGCX).
While the euro is clearly struggling with the Brexit vote hangover, the expected dollar momentum will trigger further weakness in the euro towards 1.0650 before a reversal upwards to close out the year.
Gold is also expected to remain choppy with further weakness expected.
The asset was hit hard following the Indian prime minister Narendra Modi’s landmark announcement to demonetise India’s 500 and 1,000 rupee notes – and this will no doubt hit immediate demand for gold in the upcoming months.
Following the move, and coupled with a bullish greenback, gold has slipped to five-month lows at US$1,216 an ounce on the DGCX.
We expect a test initially of the channel between $1,180 and $1,200 with the next support coming at $1,140. While the next few weeks will be hard for gold long positions, we expect a relief rally following confirmation of the rate hike.
The British pound has recovered to multi-week highs against the greenback – largely in part because of expectations of a strong trade relationship with a Trump-led government. GBPUSD’s move above 1.26 is short term at best and we expect the pound to settle below 1.23 levels.
And finally, the Indian rupee is set for further weakness as a result of Mr Modi’s actions from last week.
The move will result in a cash crunch in the short term, and with India still such a cash-driven economy we expect this to impact retail sales in the short term. And with bank deposits set to greatly increase, we expect lending rates to further decrease in the short to medium term, which should also weigh down the rupee’s prospects going forward. The DGCX’s December Indian rupee contract has dropped more than 1 per cent in the past month to trade at a three-month low of 146.60. Next support in the cross will come in at 145.50 levels.
Gaurav Kashyap is the head of futures at Axitrader in Dubai
business@thenational.ae
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