MARKETS: Expecting dollar to gain, waiting for FOMC decision

The only positive from the data was the upward revision for April, which provides further support that US economic momentum picked up in the second quarter. Moving away from economic data, the USD is expected to gain as we head into next week’s FOMC decision as there will be traders tempted to buy USD on the outside chance that the Federal Reserve might shock the financial markets with a rate hike.
The chances of an interest rate rise are slim, but there is an outside chance, and traders might find encouragement from knowing that the currency markets would be unprepared for such an event and the subsequent dramatic USD rally. What I would like to see from the Fed next week is to pre-announce when it will be raising rates. There are multiple benefits to doing this with the obvious being that the markets would finally receive clarity on the timing of a rate rise, something we have been waiting for. Such a move from would also provide a huge favour to emerging markets, as it would allow central banks to prepare in advance for capital outflows while also preventing continuous currency pressure.
Moving onto the currency markets, sell-on rallies continue when it comes to the Euro. As regards the Eurodollar, the 1.14 area is still seen as the current upper level for the pair, and traders have enjoyed the opportunity to enter selling positions on over-extensions with EURUSD falling as low as 1.1182 on Thursday. All attention in Europe continues to be on Greece with the ongoing negotiations still attracting major headlines. Athens is desperate for cash and time is running out to agree a deal with its creditors, with the ongoing situation a constant threat to investor sentiment.
Meetings between Greece and its creditors have failed to achieve anything. While there were reports that Germany’s stance is softening, this has been contrasted by headlines on Friday that Greece is no longer ruling out a default. Thursday’s news that IMF officials were walking away from negotiations with Greece just outlines how far from a deal we really are. With just 18 days left for Greece to repay the IMF over $1 bln, the Euro remains vulnerable to further declines as a result of the ongoing uncertainty.
Interestingly, demand for Gold failed to budge despite IMF walk-out news. Any movement in gold continue to be limited to US economic news and the interest rate outlook from the Fed. If the US central bank tests the patience of USD traders by providing no clarity on when they will begin raising US interest rates, this would be bullish for gold. The longer-term outlook is still underpinned by interest rate expectations, however any vulnerability for US softness as a result of impatience from traders does provide short-term opportunities for gold.
The NZDUSD is still hovering near 5-year lows below 0.70 after crashing over 200 pips following the Reserve Bank of New Zealand (RBNZ) surprising the markets with an interest rate cut. The RBNZ only raised rates during three consecutive meetings a year ago and the sudden shift in policy can be used as a direct example of why the Fed needs to be cautious when it comes to US interest rate increases. Changing market conditions, such as the fall of commodity and dairy prices, have created unexpected pressures on the New Zealand economy which is why the RBNZ cut rates.
While the RBNZ can afford itself the flexibility to accommodate changes in policy, the Fed will never have this type of flexibility to shift policy so suddenly and this would create havoc on the global markets. You just have to imagine what type of impact this would have on the emerging markets to understand exactly why the pace of US interest rate rises will be very slow.
After advancing to a monthly high at $61.81 following another reduced US trade surplus, WTI oil has slipped by just over a cent to $60.08. While US inventories are consistently dipping lower, investment in oil production throughout the Middle East is increasing and OPEC is trying to regain market share by squeezing out US producers. The recent International Energy Agency (IEA) report said that although demand for the commodity is increasing, OPEC supply is at its highest level since August 2012. This means that the oversupply concerns will remain as a dominant threat to investor sentiment and will also inspire the price of WTI to remain low.
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