Following Mario Draghi’s self-imploded QE bazooka of last week, in which the ECB launched its boldest monetary expansion measures ever, only to see this announcement being sabotaged by Draghi’s ‘no more future rate cuts’ comments, this week is sure to be a very eventful one, with many items on the economic calendar being released – and in which trading in financial and currency markets should be more than challenging.
On Tuesday and Wednesday, the Federal Reserve is meeting and is being widely expected not to hike rates at this time. Still, it is expected to offer hawkish views, based on the latest US economy numbers, hinting at a new rate hike to come soon. Should this be the case, you can expect changes in the currency markets. There would be a nice profit to be made with the USD’s likely recovery from its short squeeze driven correction. And, if the Fed were to surprise the markets with an outright rate hike, as Jim Rickards says is possible, then the USD would likely go through the roof and USD bulls would have a spectacular ROI.
The US retail sales and CPI data, to be released on the same days of the Fed’s FOMC meeting, are very likely to influence the Fed’s tone and the market’s reaction to what Janet Yellen announces. Low CPI and retail figures in line with expectations would strengthen the expectations of a new rate hike to come soon, again reflecting on bullish USD forex signals.
Having said this, Ridge Capital Markets believes that this week is very likely to see the USD going up against the EUR (which, despite Draghi’s ‘no more rate cuts’ comments – which cannot be taken seriously –, is on its way down, based on Europe’s many current troubles and on this very massive ECB QE program).
As for the JPY and BOE, they are likely to feel the Fed-driven USD strength as well. After all, this week, the BOJ and the BOE are also to announce their policies on interest rates. The BOJ is the most aggressive central bank in the world, so it is very hard to anticipate what it will do, after its recent decision to enter the negative rate territory. Still, the markets are expecting Kuroda to leave Japan’s interest rates as they are. The same happens with the BOE, as a rate hike in the UK would only send even more tensions into the dominant ‘Brexit’ influenced scenario, so the markets are expecting the Bank of England to leave the interest rates at their current level. So both the JPY and GBP are likely to be very dependent on the USD’s performance.
As for crude oil, with its rally now ostensibly losing its strength, and with the current oversupply of oil in the markets and a coming oil storage crisis that will leave the extra supply of oil nowhere to be stored, oil is likely to start its way down again, and even more so if the Federal Reserve does bring a hawkish tone to its announcements. So taking advantage of the recent oil strength makes sense, if you want to make a profit betting on a probable short-term oil correction. This would also send the MXN, CAD, RUB and other oil currencies down – along with commodity currencies in general (it is perhaps better not to trade the BRL for now, though, since the political turmoil in Brazil and the hopes that Rousseff will be ousted may influence the currency’s performance, more than the technicals and fundamentals probably will).
As for Gold, all this uncertainty may add to gold’s rally. In technical terms, gold is having a classic breakout that should encourage investors. Still, it’s showing signs of losing its recent strength. If the Fed is as hawkish as can be expected this week, gold can start to make its way back to its lows. Still, it must be said that the long-term fundamentals of gold could not be better and also that gold has been going up despite the Fed’s recent hawkish signs, so gold, here, is a difficult asset to trade on a short-term basis.