Weekly Outlook Ending on 27th August 2016
U.S. dollar jumps after Yellen’s speech.
The dollar popped higher after Federal Reserve Chair Janet Yellen said the case for U.S. interest rate hikes has “strengthened”. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, initially hit highs of 94.98, before pulling back to 94.39, down 0.32% for the day. The dollar initially strengthened after Yellen said in a speech at Jackson Hole that the case for raising U.S. interest rates has strengthened in recent months, citing improvements in the labor market and hopes for modest economic growth. But the dollar then reversed initial gains on the view that the timing of any such monetary tightening is still some way off. The U.S. central bank raised interest rates for the first time in almost a decade in December. Expectations of higher interest rates typically boost the dollar by making it more attractive to yield seeking investors. The Commerce Department said U.S. economic growth for the second quarter was revised slightly to an annual rate of 1.1%, from an earlier estimate of 1.2%.The dollar remained on the defensive as traders waited to see if the speech by the Fed chief at the Jackson Hole central bank symposium later Friday would provide any fresh indications on the future path of U.S. interest rates.
Yellen could restate the hawkish view of the U.S. economy expressed by Fed officials in recent weeks or echo the minutes of the Fed’s July meeting, which indicated that officials are divided on when to raise rates. Recent upbeat comments by Fed officials were seen as boosting the prospects for a rate hike this year. On Sunday Fed vice Chair Stanley Fischer said inflation is within “hailing distance” of the bank’s 2% target. The remarks came after speeches last week from San Francisco Fed head John Williams and New York Fed chief William Dudley indicating that the central bank thinks the economy is strong.
Pound slides down against dollar.
The pound slid lower against the U.S. dollar on Friday, despite the release of positive data from the U.K., as Thursday’s upbeat U.S. economic reports continued to lend support to the greenback. GBP/USD hit 1.3112 during European morning trade, the session low; the pair subsequently consolidated at 1.3115, declining 0.43%.Cable was likely to find support at 1.2976, Wednesday’s low and resistance at 1.3449, the high of August 4.The U.K. Office for National Statistics said that public sector net borrowing declined by £1.47 billion in July, compared to expectations for a £1.20 billion fall. Public sector net borrowing increased by £7.51 billion in June, whose figure was revised from a previously estimated £7.31 billion gain.
But the dollar remained supported after data on Thursday showed that initial jobless claims decreased by 4,000 to 262,000 last week, compared to expectations for a 1,000 decline to 265,000.Separately, the Federal Reserve Bank of Philadelphia said that its manufacturing index rose to 2.0 this month from July’s reading of minus 2.9, in line with the consensus estimate.
Gold ticks lower against Strong dollar push.
Gold fell sharply on Friday, erasing most of its gains from the previous day's rally, as strong U.S. economic data bolstered a resurgent dollar, potentially increasing the likelihood that the Federal Reserve will raise interest rates before the end of the year. On the Comex division of the New York Mercantile Exchange, Gold for August delivery traded between $1,319.00 and $1,333.45 an ounce before settling at $1,323.15, down 7.85 or 0.59% on the session. Gold closed Friday's session near three-week lows, ending the week with its second consecutive weekly decline. Although Gold has retreated from 28-month highs from earlier in July, the precious metal is still up by nearly 25% year-to-date. Gold likely gained support at $1,253.70, the low from June 24 and was met with resistance at $1,368.60, the high from July 7.The U.S. Dollar continued its upward climb on Friday, amid broad signals that conditions in the struggling manufacturing sector have bottomed. On Friday, the flash reading for July's PMI Manufacturing Index surged more than a full point to 52.9, soaring to its highest level in nine months. The unexpected rise was driven by a flood of new orders, as new business volume expanded at the fastest pace since October, 2015. At the same time, the dollar rose considerably against the British Pound after Markit reported that the British economy shrank at its quickest pace since early-2009, as economists digested the release of the first batch of Post-Brexit data since last month's surprising decision. Investors await next week's Federal Open Market Committee (FOMC) July meeting for further indications on the timing of the U.S. central bank's next rate hike. On Friday, Fed Future Rates from the CME Group's (NASDAQ:CME) Fed Watch tool placed the odds of a single rate hike in 2016 at just under 50%. Any rate hikes by the FOMC this year are viewed as bearish for gold, which struggles to compete versus high-yield bearing assets in periods of raising rate environments.
Crude hit high at tension in Saudi on weekend.
Oil prices rose on Friday following reports that missiles from Yemen had struck oil facilities in Saudi Arabia and as the dollar weakened following remarks by Federal Reserve Chair Janet Yellen. Crude oil for October delivery on the New York Mercantile Exchange rose 50 cents, or 1.06%, to trade at $47.83 a barrel by 1113 ET. Global benchmark Brent was up 49 cents or 0.93% to $50.16 on the ICE Futures Europe exchange. Oil prices jumped following media reports that Yemeni missiles hit facilities belonging to the Saudi state oil giant Aramco. Oil prices received an additional boost as the dollar weakened against a basket of currencies after U.S. Federal Reserve Chair Janet Yellen's comments at Jackson Hole. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, initially hit highs of 94.98, before turning lower. The dollar initially strengthened after Yellen said that the case for raising U.S. interest rates has strengthened in recent months, citing improvements in the labor market and hopes for modest economic growth. But the dollar then reversed initial gains on the view that the timing of any monetary tightening is still some way off. The U.S. central bank raised interest rates for the first time in almost a decade in December. Expectations of higher interest rates typically boost the dollar by making it more attractive to yield seeking investors.
Summary of the week:
It was a flat week for U.S. equities. Starting with the U.S. stocks; Dow Jones in loss of 90 points and 0.47%. Nasdaq Composite loss 0.30% and down by 16 point. S&P 500 down by 9 points for the week.
Coming to European counterparts, UK’s FTSE 100 down by 2 points and 0.03%. German DAX 30 added 68 points and 0.64%. Additionally French CAC 40 gain 47 points and 1.02% on the weekly basis.
In commodities Gold down by $20 and 1.55% while Crude Oil down by $2.40 and 5.43% over the week.
Euro gain 1.27% over the week while Yen gain 0.60. Pound loss 1.51% & Ice dollar index got 1.35% on this week.
Note: Here all the currencies are measured in percentage against the U.S. dollar