Since my last column in mid-August, the US dollar index has slipped to near two-year lows. After initially picking up bids towards the end of the first quarter, which coincided with the start of the pandemic, the dollar has since sunk to as low as 91.75 after a four-month slide from May to August saw the greenback shed close to 7.5 per cent.
This dollar weakness saw other currency and commodity markets hit multi-year highs in this period. Gold for immediate delivery famously hit a record high at $2,075 last month, while the EUR/USD similarly traded above 1.20 levels for the first time in nearly two years.
After hitting a low of 1.1410 on March 20, the GBP/USD hit as high as 1.3480 on September 1 – an incredible 18 per cent move in six months. With such a sustained period of dollar weakness, I feel we are approaching a critical juncture for the greenback.
The past six months have coincided with massive easing measures from the Federal Reserve. During this period, the central bank has injected more than $3 trillion (Dh11tn) to prop up an ailing US economy – taking the total Fed balance sheet to 1.7x its size compared with just six months ago.
Markets lapped up the record easing measures – yields on US Treasuries were in control, US stock markets whipsawed to post record highs and the dollar remained under pressure. While these Fed measures could have longer-term impacts on the value of the dollar, in the near term, I expect to see a correction in favour of the greenback.
As the Fed has played its hand, focus will turn to other global central banks who may be forced to act. If we focus on the Euro area, this could prove to be a pivotal week for the USD against the euro. While we can expect to see no changes at the European Central Bank’s rate decision on Thursday, markets could perhaps be positioning themselves for hints to further easing measures from the ECB.
As we enter into the heart of autumn, coronavirus cases are on the rise once again and this will no doubt cramp economic productivity, which the ECB will be vigilant to address. When looking at the seven-day rolling averages across Europe, France and Italy combined have, on average, a daily infection rate five times higher than one month ago, while Spain is reporting 2.5 times the daily cases compared to a month ago. And we are seeing this translate into the euro data docket.
Last week’s Euro area services PMI print showed a weaker expansion in the services sector, while job losses were recorded for a sixth straight month. This has seen EUR/USD move back down towards 1.18 levels, where the pair currently finds itself consolidating.
While I feel euro traders are largely pricing in the potential for further easing from Christine Lagarde and the ECB, I expect further downsides towards 1.1720 in the next two weeks. September 14 sees the release of Euro area industrial production (previously -12.3 per cent) and this is followed by the ZEW economic sentiment on September 15.
Coupled with both manufacturing and services PMI on September 23, these data points will spark interest in Euro bears through the end of the month. While things are quick to change in the current market climate, I expect to see 1.17 levels holding for the euro and maintain 1.1950/1.20 as a strong ceiling, which will not be breached for the next two months.
Looking at the other star performer of the summer months – sterling easily achieved my 1.32 target given back on August 12. However, it is now set to come under a bit of pressure with the renewal of round eight of Brexit negotiations this week. Markets were caught by surprise this week when Prime Minister Boris Johnson threatened to override the EU's withdrawal agreement and jeopardised trade talks, as reported by the Financial Times. The newspaper reported that Mr Johnson's government will release a bill later today, which will, in effect, "eliminate the legal force of parts of the withdrawal agreement".
Continue to watch for developments this week, which should see GBP/USD testing 1.30 in the week ahead.
And finally, gold has settled after a tumultuous August. The precious metal is firmly trading in the mid-$1,900 range. My downside target of $1,905 given last month was achieved and I see this as a strong support level going forward for the precious metal. For short-term traders looking for an opportunity, long positions at $1,910 or below could prove fruitful in the near term.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti