Market Analysis: Key Week Ahead
by Christala Parmaxi, CFTe
The previous week ended with a clear winner and a clear loser of the majors’ group. The Euro was the only pair that closed the week higher against all of its major counterparties, while the New Zealand Dollar was the only major closing the week lower against all of the G7 members. Consequently, this combination made the EURNZD very attractive to the bulls which boosted the pair to a range of 4 cents, from 1.5048 to 1.5443, with the Euro appreciating 2.1% against the Kiwi. The US Dollar closed the week higher against all of the G7 except the Euro which surged on ECB President Draghi’s comments during the Press Conference of the ECB monetary policy meeting.
Although the dovish ECB statement accompanied the hold interest rates decision, Mario Draghi was optimistic this time signaling that there is no longer the urgency to take actions for the economic growth, based on the headline inflation improvement. However, the statement indicated that the rates will remain at present or lower levels for an extended period of time and the increase of the QE program is likely if the outlook becomes less favorable in contrast to the current one. Since the dovish statement was expected, the optimism of the ECB President locked profit to Euro’s long positions since Euro tested 1.07 on Friday (breaking it today) and EURGBP is testing the level of 0.88. The short-term outlook of the Euro remains bullish at the time of writing but we are watching Fed’s moves closely since the statements of FOMC Chairwoman on Wednesday will determine US Dollar’s and EURUSD short-term outlook.
Friday’s highlight was the NFP report which was released at 235K against expectations of 200K while the unemployment rate fell into the expected figure of 4.7%, 10 points lower than the previous release; the Average Hourly Earnings missed the expectations of 0.3% releasing at just 0.2%. Average Hourly Earnings drop was not a reason to drop the Fed Funds Futures likelihood of a rate hike on Wednesday which is 93% today. However, the US Dollar sank on Friday closing the day -0.85% against the Euro and between 0% to -0.40% against the rest of the majors. The increase of the NFP was already anticipated by the traders as the ADP Nonfarm payroll surged to 298K, the highest figure since March 2006. Another reason that may cause the Dollar to fall could be multiple simultaneous profit locks on bullish positions. Dollar’s next movement will depend on Fed’s next policy meeting on Wednesday.
The week ahead will be a key week for financial markets as it’s packed with major economic events such as the Fed and the Bank of England policy meetings. Monday started light as it usually does, while Tuesday has kicked off with the Chinese Industrial Production during the Asian morning, which was expected higher than the previous month at 6.2%. Moreover, the German ZEW economic sentiment Index is scheduled to be released during the European morning at 10:00 GMT with expectations lying higher against February’s. From the US, we get February’s Producers Price Index which is expected lower than January’s by 50 basis points, falling from 0.6% to 0.1%. That could extend US Dollar’s losses before the Fed on Wednesday.
During Wednesday’s European Session the British Average Earnings Index will be published and expectations are looking for a drop of 20 points, at 2.4%. At the same time, 9:30 GMT, the British Claimant Count Change will be released and it is expected higher than last month indicating weakness of UK employment data. From the US, we expect the core CPI with lower expectations at 0.2% and the Retail Sales which are again expected lower than the previous figure by 30 basis points, at 0.1%. The forecasts for all the US economic releases are lower than the previous year, which puts further pressure on the US Dollar until the Fed monetary policy decision, economic releases and statement at 18:00 and the FOMC Press Conference at 18:30 GMT.
The Fed is widely expected to raise the interest rate by 25 basis points, from 0.75% to 1%. If this is not the case, then we will definitely see a downside rally on the US Dollar. On the other hand, March rate hike is already anticipated by the market participants and thus it is already discounted in the Dollar’s price. An increase on the interest rates won’t catch investors by surprise so the US Dollar is unlikely face an extraordinary rise upon the decision announcement. What is more interesting is FOMC statement and Janet Yellen’s speech during the Press Conference. Investors take the March rate hike as given, but they are looking forward to hints about the next rate hike and whether there would be two or three hikes in 2017. The major question now is whether the next rate hike would be June or September, the Fed Fund Futures are currently giving a probability of around 45% in June. If Yellen hints about June and keeps an overall hawkish tone, then we see the Dollar surging while an opposite scenario would hurt the greenback. In our view, the risks are more likely to the downside than to the upside since the rate hike is already priced in and it is too soon to look for hints of the new hike. But any such hints would probably drive the US Dollar to new session highs.
Around three hours after the Fed decision, at 21:45 GMT, the New Zealand GDP for the 4th quarter of 2016 is expected to be released at 0.7% against the previous figure of 1.1%. Such a figure will likely hurt the Kiwi, which is trading on session low levels already, even more. During Thursday’s Asian morning we get the Australian Employment change with forecasts around 16K against 13.5K on January which can give a pullback to Aussie’s weakness. Moreover, Thursday is again an exciting trading day since the policy meetings of the Bank of Japan and the Bank of England will be held. The Bank of England is expected to stand pat holding interest rates at 0.25%, the focus will be on the meeting minutes and the Bank’s inflation forecast which is likely to affect Pound’s direction. The BoE decision together with the possibility of the PM May triggering article 50 this week will be critical for the Pound and major fluctuations of Pound’s pairs are likely. As for the Bank of Japan, it is expected to keep its monetary policy unchanged as well and the focus would be on any hints to the future policy plans of the Bank.
There is more from the US on Thursday; the Building Permits, Philadelphia Fed Manufacturing Index and JOLTs Job Opening which are all expected lower than the previous releases and not supportive of Dollar’s strength. Friday is light with no significant economic releases.
The critical levels on the 4-hour chart are the supports of 1.062, 1.0575 and 1.052 and the resistances of 1 and 1.077. EURUSD has officially created a new high signaling the beginning of an uptrend and breaking the resistance of SMA200. Monday was a quiet day thus there was a small consolidation to the downside from the pair. The momentum indicators are on bullish territories but slopping downwards. A correction down to 1.062 is possible and then it will depend if the pair breaks this level to the downside or not for further moves. The overall outlook is bullish thus we would recommend buy limit positions at around 1.063 targeting the psychological level of 1.07.
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
June 8, 2017
June 6, 2017