A roundup after the Fed meeting and as we focus on the UK election
The dollar has been one of the biggest losers among major currencies so far this week. Among other factors, the announcement on Tuesday that Democrats in the House of Representatives are launching proceedings for impeachment against Donald Trump was a negative. The most important factor though was Wednesday night's comments from Jerome Powell to the effect that consistent inflation would be needed before the Fed resumed hiking its funds rate.
Meanwhile British three-month average GDP came in at 0%, but markets haven't reacted much to stagnation in the UK. Expectations are holding that the Conservatives will win a workable majority in Thursday's general election. This would be a positive for the pound because it would probably lead to Boris Johnson's Brexit deal being passed by the deadline of 31 January.
The euro made some gains against most other currencies
in the aftermath of unexpectedly strong data on Monday and Tuesday. Traders
have generally been reluctant to commit to the euro so far this week given that
the ECB meeting is on Thursday afternoon.
Cable, four-hour
The pound's boost from polling continued last week as parties enter the home stretch of this short election campaign. Mr Johnson seems to be in his comfort zone and Labour has continued to face serious challenges around the costs of its manifesto proposals and of course the ongoing row over antisemitism. The consensus prediction at the time of writing is a Conservative majority of about 20-30. As ever, though, it would be foolish to rely on polling alone to buy (or sell) the pound.
Britain's economy stagnated in both October and in the third quarter of 2019 as a whole. Monday's GDP release didn't have much effect on the pound, though. Weaker data has generally been expected by most analysts and traders as the effect of 'Brexit stockpiling' wore off in the first half of this year. Equally Thursday's election overshadows basically every other item of news for the pound.
The technical picture is pretty consistent with what one might expect shortly before a major election. There was a degree of indecision on Friday night with three dojis preceding a hesitant retreat from the highs. This week though the pound touched new highs against the dollar, even moving slightly above $1.32 for a brief period.
On the other hand, cable remains clearly overbought on the longer daily timeframe. This means that most traders will probably not be buying in here. Elections and referenda over the past few years have been unusually difficult to predict with much accuracy; in the unlikely event of Labour winning a majority, many will have their fingers on the button ready to sell.
Some early warning of the final result generally tends to come from counts in the north-east of England. Seats in and around Newcastle, Sunderland, Durham, etc. could be the first signs of a major shift around 1.00 to 2.00 GMT on Friday morning as they were in 2016's Brexit referendum. Ultimately, anybody wanting to trade the pound on Friday morning GMT during the count needs to take great care to cut losses short quickly and avoid making any large orders.
Euro-dollar, four-hour
It's been relatively quiet for euro-dollar this week so far as traders await the ECB's meeting on Thursday. Monday's balance of trade from Germany for October was surprisingly good, with €21.5 billion beating the forecast by a whole four billion. September's figure was also revised upward to €21.2 billion.
Tuesday's ZEW sentiment also gave bulls a reason to cheer, coming in at positive 10.7, more than ten times better than the consensus prediction. Then on Wednesday night the dollar took a hit from Dr Powell's comments that inflation would need to be 'significant and persistent' before the FOMC considered hiking rates again.
A double golden cross is visible on the chart here this week as the 50 SMA from Bands has moved above both the 100 and 200 SMAs. The 23.6% Fibonacci retracement area seems to be quite an important zone which price is currently testing to the downside. The key technical area to the upside here is the psychological zone of $1.117 from the daily charts. This seems likely to withstand testing this week unless the news from the ECB is extraordinarily positive.
The background of good data and the FOMC's reluctance to raise rates means that the euro's on the front foot so far this week, but Thursday's events are likely to bring considerable volatility for euro-dollar.
Dollar-yen, four-hour
Dollar-yen is generally one of the more sensitive pairs in the ongoing trade dispute between the USA and China. No surprise then from the effect of last week's news from Mike Pence among others that a first stage agreement is less likely. 15 December is the deadline for the introduction of new tariffs on Chinese goods: it seems fairly clear now that an agreement can't be reached before then. However, it's still possible that these new tariffs could be delayed into the new year.
The dollar looked likely to move down at the beginning of the week as Japan released positive GDP data on Sunday night GMT. There was no real attempt to follow through, though. The technical picture at the moment then is one of indecision and perhaps consolidation around the current area.
This article was submitted by Michael Stark, market analyst at Exness.
Disclaimer: Opinions are personal to the author and do
not reflect those of Exness.
