Dollar longs thrived through the latter half of October, with the Dollar Index hitting three-month highs at 95.06.
At the start of October, we noted the positive shift in dollar sentiment going into the fourth quarter and that momentum will continue to carry into November.
Encouragingly, the US data docket recently showed that gross domestic product rose by 3 per cent in the third quarter, well above the expected 2.5 per cent reading, and this development will no doubt solidify market expectations of an interest rate rise from the Federal Reserve in December.
It would be too early to expect any action at the October/November meeting, which takes place today and tomorrow, but expect to see more upbeat comments from the Fed about US economic prospects and continued support for the dollar going into the final meeting in December.
Also supporting the dollar in the interim has been the optimism about president Donald Trump’s tax plans.
The house of representatives passed the Republican tax bill last week, a positive move that paves the way for the president to deliver the plan to congress this week.
There will be a lot of opposition on both sides of the aisle in finalising the master tax plan, putting any bigger gains for the US dollar in check.
Keeping an eye on the political scene in Washington – moving closer to a signed-and-sealed tax plan will continue to benefit the dollar. The Fed is waiting for more clarity from Washington and this trend is set to continue. Expect a more flexible and hawkish Fed with a delivered tax plan in place.
Coming up on the US calendar is the Federal Open Market Committee rate decision on Wednesday evening and the US non-farm payrolls report due this Friday. After a disastrous reading last month – 33,000 jobs were lost as a result of hurricane season – we expect to see a strong rally in the numbers. Any gains of more than 300,000 will result in dollar longs building over the next week.
We will also watch the average hourly earnings due on Friday. These are a key piece of the US inflation puzzle and a reading of 0.2 per cent or higher on the month is needed to further build on US dollar gains through the start of November. All things considered, this paves the way for a move towards the channel of 96.60 to 97.40 for the US Dollar Index in the weeks ahead.
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Across the Atlantic, the euro remained sensitive. Dubai Gold & Commodities Exchange (DGCX) Euro contract found support at 1.16 levels after sinking more than 1.4 per cent on the month. The euro has been susceptible to downsides as a result of developments in Spain over the past few weeks – and with Spain's legal moves against Catalan independence last weekend, we expect a bounce back in the euro crosses in the weeks ahead.
Weighing down sentiment, however, would be the less than optimist decision announced by European Central Bank (ECB) president Mario Draghi last week. Keeping rates unchanged as expected, the ECB president cut the current €60 billion ($69.72bn) monthly asset purchases in half to a revised €30bn per month starting from January.
It was his open-ended and non-committal stance that caught euro longs off guard and saw the EUR/USD shed more than 160 points on Thursday. We expect strong support at 1.16 levels in the weeks ahead, however upsides would be capped at 1.1750 levels, which forms the lower channel of the monthly Ichimoku Cloud.
Gaurav Kashyap is a market strategist at EGM Futures