Weekly Outlook Ending on 22th October 2016
Dollar remains at 8-month high with the expectation of rate hikes.
The dollar remained at eight-month highs against the other majors currencies as hopes for a U.S. rate hike before the end of the year continued to lend broad support to the greenback. The dollar was on course for its third consecutive week of gains against the basket of currencies used to measure its broader strength on Friday, driven by hardening expectations of a rise in interest rates in December. In a year where investors have never really got close to fully pricing in a move, short-term U.S. rates now put a 75 percent probability on the Federal Reserve raising official borrowing costs for only the second time in more than a decade. After a blip in the first half of this week, comments by New York Fed President William Dudley and Donald Trump's failure to register a big win in Wednesday's presidential debate has hardened that view, fueling another surge for the greenback. European Central Bank chief Mario Draghi's quashing of speculation it was already considering how to wind down bond purchases when the time comes also cooled any signs of recovery for the euro. "The dollar rally appears to be back on after it struggled at the start of this week," said Kathleen Brooks, research director at City Index in London. Some analysts said that investors were again shifting towards "carry" trades that use the expanding difference between interest rates on the dollar and those in other currencies to rack up profit.
Euro declines against strong dollar
The euro fell sharply on Friday, as the dollar continued its rally from 9-month lows amid an unexpected surge in U.S. consumer sentiment. The euro has now closed lower versus the dollar in eight of the last nine sessions. Despite the recent downturn, the euro is still up against American counterpart by more than 4% since the start of the year. EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.On Friday morning, the University of Michigan's Consumer Survey Center said its Consumer Sentiment Index soared nearly seven points in its mid-May flash reading to 95.8, significantly above consensus expectations of 89.7. It came weeks after consumer sentiment slumped to 89.0 in the final April reading, dropping to its lowest level since last September. In the May reading, though, the expectations component surged nearly 10 points to 87.5, pulling up the general index. Over the last year, the sluggish expectations component has dragged down consumer sentiments overall. Earlier on Friday, the U.S. Census Bureau said retail sales last month jumped by 1.3%, above consensus expectations of 0.9%, rebounding from a 0.3% decline in March. The overall reading received a lift from auto sales, which surged 3.2% on the month. Still, core retail sales, which discounted the effects of auto purchases, increased by 0.8% above analysts' forecasts for gains of 0.5%.Investors also continued to react to a letter from Federal Reserve chair Janet Yellen to a member of the House Financial Services Committee on Thursday afternoon regarding the Fed's remote possibility likelihood of adopting a negative interest rate policy in the near future. In the letter addressed to Rep. Brad Sherman, Yellen said the Fed would not rule out the possibility of lowering rates into negative territory if an extremely adverse scenario arises in the coming months. Over the Federal Open Market Committee's (FOMC) first three meetings of 2016, the U.S. central bank has held its benchmark interest rate steady while central banks in Japan and the euro area have adopted negative interest rate regimes. Market players also reacted to a flattening in the yield curve between short-term U.S. 2-Year Treasuries and longer-term 10-Year government bonds in Friday's session. At session-highs, the 2-year surged to 0.786%, its highest level in 10 days. Around the same time, government bond yields on the 10-year fell to a one-month low at 1.705%. A flattening of the yield curve typically sends indications of a slowdown in short-term economic activity.
Pound posted modest Loss on negative U.K. data
The pound edged lower against the U.S. dollar on Friday, after the release of downbeat U.K. public sector borrowing data, while expectations for U.S. rate hike before the end of the year continued to support the greenback. GBP/USD hit 1.2224 during European morning trade, the session low; the pair subsequently consolidated at 1.2234, down 0.16%.Cable was likely to find support at 1.2086, the low of October 11 and resistance at 1.2376, the high of October 11.The U.K. Office for National Statistics reported on Friday that public sector net borrowing rose by £10.12 billion in September, compared to expectations for an increase of only £8.20 billion. Public sector net borrowing rose £10.33 billion in August, whose figure was revised from a previously estimated gain of £10.05 billion. Meanwhile, expectations for a 2016 U.S. rate hike continued to support demand for the greenback. New York Fed President William Dudley said on Wednesday that the U.S. central bank will likely raise interest rates later this year if the economy remains on its current trajectory. Sterling was higher against the euro, with EUR/GBP shedding 0.24% to 0.8897.The single currency remained under pressure after European Central Bank President Mario Draghi said on Thursday that an adjustment to the bank’s stimulus program could come in December, saying its assessment would benefit from new economic projections to be drawn up by ECB forecasters. The comments came after the ECB left interest rates unchanged at record lows of zero earlier Thursday and kept the deposit facility rate at -0.4%.
Gold slips against strong Dollar.
Gold prices slipped lower as a stronger U.S. dollar weighed on the precious metal, although the European Central Bank’s latest policy decision lent some support. On the Comex division of the New York Mercantile Exchange, gold futures for December delivery were down 0.28% at $1,264.05.The December contract ended Thursday’s session 0.19% lower at $1,267.50 an ounce. Futures were likely to find support at $1,249.90, the low from October 17 and resistance at $1,270.50, Thursday’s high. Gold prices remained under pressure as expectations for a U.S. rate hike before the end of the year continued to lend broad support to the greenback. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.13% at a fresh seven-month high of 98.42.A stronger U.S. dollar usually weighs on gold, as it dampens the metal's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies. The precious metal had briefly strengthened after ECB President Mario Draghi said on Thursday that an adjustment to the bank’s stimulus program could come in December, saying its assessment would benefit from new economic projections to be drawn up by ECB forecasters..
Crude rose over $50/barrel levels.
Crude oil rose above the $50 a barrel threshold after Russia reiterated its commitment to contribute to a global output freeze, although a stronger U.S. dollar limited the commodity’s gains. U.S. Crude futures for December delivery were up 0.36% at $50.81 a barrel, not far from Wednesday’s four-month high of $51.94 a barrel. On the ICE Futures Exchange in London, the December Brent contract climbed 0.56% to trade at $51.67 a barrel. Crude prices strengthened after Russian Energy Minister Alexander Novak said on Friday that an oil production freeze deal was necessary to support prices and that he would make proposals to his Saudi Arabian counterpart this weekend. The Organization of the Petroleum Exporting Countries is set to hold a meeting on November 30 to further discuss the details of a global output freeze. Late last month, OPEC reached an agreement to limit production to a range of 32.5 million to 33.0 million barrels per day in talks held on the sidelines of an energy conference in Algeria. However, market analysts have been skeptical of the deal, pondering how such a plan would be implemented. But the commodity’s gains were expected to remain limited as expectations for 2016 U.S. rate hike continued to support the U.S. dollar. New York Fed President William Dudley said on Wednesday that the U.S. central bank will likely raise interest rates later this year if the economy remains on its current trajectory.
U.S. stocks and S&P 500 was positive on weekend.
It was positive week for U.S. equities. Starting with the U.S. stocks; Dow Jones added 50 points and 0.28%. Nasdaq Composite gains 1.03% and 54 point. S&P 500 gains 11 points and 0.51 % for the week.
Coming to European counterparts, UK’s FTSE 100 gains 46 points. German DAX 30 added 13 points and 0.27%. Additionally French CAC 40 losses 86 points and 2.05% on the weekly basis.
In commodities Gold gains $14 while Crude Oil gains $1.20 over the week.
Euro lost 1.34% over the week while Yen gain 0.56 %. Pound loss 0.92% and dollar index added 0.95% on this week.
Note: Here all the currencies are measured in percentage against the U.S. dollar.