21st September - Wait and watch for a Dollar break
25 September 2017
TECHNICALS:
Dollar Euro Spot monthly chart
The penetration of the successive horizontal resistances fro Prior Lows has been impressive - but the market hasn’t escaped the clutches of those resistances yet...
The balking at the 1.2040 level is clear...
Dollar Euro Spot weekly chart
The hesitation at 1.2040 is clearly a congestion area, no doubt.
But the Euro bulls will point to the massive support for the Euro beneath the market from the Triple Bottom reversal already in place!
The horizontals from the Highs at 1.17 and 1.16 will be powerful support on any pull-back.
So wait for the Dollar to break out of the band 1.16-1.21 before taking a stance.
FUNDAMENTALS:
The Dollar has had something of a roller coaster ride over the past 10 months or so. When it looked like Trump was set to become President in the final run up to the US Presidential election, the Dollar enjoyed a strong rally against the other major currencies, especially the Euro.
At that time the ECB was fully engaged in its own QE program as the focus for the ECB remained driving inflation up towards its 2% target and trying to turn a fledgling recovery into a self-sustaining one.
By contrast, traders and investors looked at the US and saw a President with pro-growth policies designed to:
All of which would have meant an increase in the budget deficit and a likely inflationary spurt, requiring the Fed to become more aggressive with monetary policy.
In the event, President Trump has struggled to get his policy agenda into play, as he has been troubled by a scandal centred on whether or not his campaign team had inappropriate contacts with Russian government officials, which many claim helped win him the election.
As a result traders lost patience and the Dollar bull trade faded and unwound, allowing the Fed to stick with its policy of slow and gradual adjustments to interest rates.
To make matters worse for the Dollar, the Euro economy has finally begun to expand at a rate sufficient to allow the ECB to begin reducing its QE Bond purchases and although a decision is yet to be made, action is anticipated in the final quarter of this year.
Back to the US. The Fed recently made it known that policy makers want to begin the process of reducing the Fed’s bloated balance sheet, but they had also indicated that interest rates would likely remain steady during the initial phase of balance sheet reduction due to the unexpectedly benign inflation environment, despite a robust labour market.
Going into yesterday’s FOMC policy meeting market consensus was broadly centred on the Fed announcing the start of balance sheet reduction, but at the same time indicating interest rates were likely to remain steady throughout the year.
That wasn’t the message the Fed delivered yesterday! The message was that the Fed is set to begin reducing its Bond holdings from October, as anticipated, but the surprise was that interest rates would likely rise again this year, probably in December and that they would continue to nudge rates higher next year, along side balance sheet reduction.
The impact on the Dollar was clear to see, it rallied against the Euro, but can it hold and extend those gains? The Fed acknowledged yesterday inflation remains surprisingly benign, but justified its stance by claiming that was likely to prove transitory, but what if inflation remains subdued, and Trump remains embroiled in scandal unable to get his policies in place, and the Euro zone economy continues to move up through the gears prompting the ECB to begin scaling back its own QE program?
In short, we judge the outlook for the Dollar, especially against the Euro is no clearer, and will likely remain that way until Trump gets his policy agenda in play and or the Russia scandal is resolved.
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29th September - The bears are weighing on US Bonds 
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8th September - How far can Gold go?