Dollar Firms: Prepare For Big Moves This Week

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The U.S. dollar had a quiet but firm start to what will quickly become a busy trading week. With four monetary policy announcements ahead, the European Union’s summit and a U.S. tax conference underway, we look forward to market-moving headlines. Add to that the release of major news reports such as US retail sales, Eurozone PMIs, UK inflation and Australian employment, we would be surprised if there weren’t big moves in FX over the next 72 hours. The firming of the dollar coincides with the reversal in 10-year yield, which started the NY session down over 2bp and ended the day up 1bp. On this relatively, quiet day, this move in U.S. rates pushed EUR/USD, GBP/USD lower and helped USD/JPY extend its gains above 113.50. Ahead of the FOMC meeting, we’re not surprised by the dollar’s bid and if this week’s economic reports show stronger inflation, we could even see USD/JPY hit 114. Traders should also watch the headlines because progress on reconciling the House and Senate tax bills could also extend the dollar’s gains.

While the euro ended the day unchanged against the greenback, we think the single currency could face further losses this week. As the year draws to close we don’t see a compelling reason for the ECB to move away from its accommodative monetary policy stance. The bank made it very clear at its last meeting that it would keep rates steady until QE ends, which means no rate hike until October 2018. So despite improvements in data, we don’t expect the ECB to alter its view this Thursday after having just tweaked its asset-purchase program in October. The German ZEW survey is due for release on Tuesday and Germany’s recent political troubles should continue to weigh on investor sentiment. Technically, if EUR/USD breaks below 1.1750, then 1.1700 becomes fair game.

Sterling was on its back foot throughout the North American trading session with GBP/USD closing at its lows near 1.3340. Technically, the currency pair is at risk of further losses, especially if it breaks the 20-day SMA (at 1.3330) in a meaningful way. Fundamentally, however, it all depends on data. This is a busy week for the pound with UK inflation, employment and retail sales data on the calendar alongside a Bank of England monetary policy meeting. The U.K. economy is performing better since the BoE raised interest rates in November but at the time, it said inflation peaked, which suggests that Tuesday’s CPI report could come in softer. If they’re right and price pressures eased in November, then GBP/USD could take out 1.33 easily.

All 3 of the commodity currencies traded higher against the greenback Monday with the New Zealand dollar leading the rally. NZD was easily the day’s best performer. The New Zealand government has chosen Adrian Orr as the country’s new central bank governor. The market likes the fact that he’s an old pro with extensive monetary policy and investment experience. As reported by my colleague Boris Schlossberg, Orr is a “former deputy governor and chief economist at the RBNZ. He currently runs the New Zealand government’s sovereign wealth fund which has returned 16.2 percent per annum over the last five years….. While Mr. Ott is neither a dove or a hawk, investors were reassured that he will keep the monetary policy on an even path restraining the worst impulses of a stimulatory monetary policy.” Given the recent consolidation and oversold nature of NZD, further gains are likely. The Canadian dollar is also consolidating its gains, suggesting a possible retracement. The Australian dollar could make a move up to .7575 but that depends largely on Monday evening’s business confidence, credit spending and house price reports.

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