June turned out to be a brutal month for the US dollar, dropping 2 per cent as the greenback was hit hard by markets becoming increasingly convinced the US Federal Reserve would adopt an aggressive stance towards policy easing.
The fallout from the US-China trade war has been taking its toll on the US data docket, and the Fed seems to have done a complete 180-turn in their policy stance. As early as March, two Federal Open Market Committee members were in favour of a hike in 2019 while 11 favoured no changes. As of the June meeting, however, only one member wanted a hike while eight saw rate cuts in 2019.
To make matters worse for dollar long bulls, of these eight members, seven see two rounds of cuts in 2019. It’s clearly not a question of if, but when the Fed will trigger its first rate cut, with the earliest opportunity to act coming at the meeting later this month. Expect the dollar to trade heavily in the lead up to this meet, with intraday pricing dictated by US data releases. Inflation has been lagging below the Fed’s target, job growth has been rocky to say the least; however, any surprise improvements in the figures will see strength in the dollar on an intraday basis.
In the lead up to the Fed meeting, keep an eye on the monthly US nonfarm payrolls report, due on Friday. Following a weaker reading in June, when only 75,000 new jobs were added, expect to see gains in excess of 150,000 this month. Also, watch out for the overall inflation reading due on July 11. Expectations are for the core consumer price index month-on-month print to come in at 0.2 per cent. Again, inflation has been a key cog of Fed policy – any surprise in the next reading and volatility will pick up in the greenback.
Positive developments from the ongoing trade war could support the dollar in the interim. The G20 gathering in Osaka over the past weekend ended in a trade truce between China and the US, which sparked a bout of dollar buying. However, the truce falls well short of an all-out deal and, until this is delivered, expect more uncertainty. My dollar forecast hinges more on Fed perceptions and going forward I caution towards a bearish bias; expect trading in the benchmark US dollar index to be very choppy in the weeks ahead with a trading range between 94.70 and 97.60 through July.
Meanwhile, what a month it has been for gold bulls. The Dubai Gold & Commodities Exchange gold contract rallied 6.5 per cent higher in June, testing six-year highs. Gold has been greatly supported by the changing sentiment in the Fed and the resulting weaker dollar. It has also been supported by the geopolitical developments emanating from the Strait of Hormuz.
While we saw a pullback at the start of July, expect the bullish bias to continue through the weeks ahead. Any dips in gold prices, particularly at 1340 levels, would be excellent entry points for a long position. Upside resistance in gold sits at 1440 levels - a break of which seems only likely after we get more clarity from the Fed during their July meet.
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
