Notes from Fed to boost Dollar on short US trading week
The U.S. dollar is higher against most major pairs ahead of the Presidents Day long weekend. American economic fundamentals had a strong week, but failed to gain traction given the rise of political risk as Trump’s administration continues to send mixed messages to markets. The stock market and safe havens like gold and the Japanese yen finished higher against the dollar in a very political week.
The Federal Open Market Committee (FOMC) meeting in February reenergized the greenback and started the current USD rally. The minutes from that monetary policy meeting will be published on Wednesday, February 22 at 2:00 pm EST (7:00 pm GMT). Fed member comments since then have confirmed the high probability of multiple rate hikes this year, although according to the CME FedWatch tool the market remains unconvinced showing a higher than 80 percent probability of the central bank keeping rates unchanged in March. Fed member Jeffery Lacker said that the market could be caught by surprise. The biggest threat to the dollar has been the political climate. Scandals on the national security front have raised red flags on the inexperience of the Trump administration.
The holiday on Monday will push the release of U.S. crude inventories back a day. The U.S. Energy Information Administration (EIA) will release its weekly statistics on Thursday, February 23 at 10:30 am EST (3:30 pm GMT). The price West Texas has not been able to push above $54 despite the efforts of the Organization of the Petroleum Exporting Countries (OPEC) to communicate the success of their production cut agreement. The main factor keeping crude at current levels is the growth of U.S. production that have kept prices in a tight range for most of 2017 even as the OPEC have hinted at an extension to their six month deal.
The EUR/USD lost 0.518 percent in the last five days. The single pair is trading at 1.0613 which is a surprise given the very strong economic data out of the U.S. this week. Strong inflation, manufacturing and retail sales data along with hawkish words from Fed Chair Janet Yellen on her testimonies before congress should have the USD trading higher. Political scandals have made the French election even more unpredictable weakening the euro, but the so-called Trump rally has been derailed by Trump himself while softening on trade has increased anti-immigrant actions all the while not given enough details on pro-growth policies to boost the USD.
Stock markets have been on a record run boosted by strong fundamentals and commentary from Fed members, but that optimism hasn’t extended to the American currency. Chair Yellen provided the most quotable sound bite when she told the Senate banking committee that it would be unwise for the central bank to wait too long before hiking rates. The translation from Fedspeak to English diminishes the hawkish tone as the Fed Chair is only implying the Fed is ready to hike but more data is likely needed before making that decision. If U.S. fundamentals can continue to beat expectations like the latest releases it could be sooner rather than later for the first U.S. interest rate hike of 2017.
Oil is flat in a volatile week that saw the price of crude move in a 1.17 percent range. The price of West Texas is trading at $53.15 as the results of the production cut by OPEC members are being cancelled by rising U.S. shale production. 72 rigs have been added in 2017 as the price of crude remains over $50. There were doubts surrounding the deal between OPEC members and 11 other oil producing nations, but so far there has been compliance. The lack of a massive price surge has OPEC contemplating an extension to the original 6 month duration of the agreement.
The boom in shale oil activity in the U.S. is a direct result of stable prices and a more industry friendly administration. The biggest challenge still facing oil prices is global demand that continues to be weak despite optimistic forecasts from OPEC and the U.S. EIA that show an improvement in energy demand.
Market events to watch this week:
Monday, February 20
7:30pm AUD Monetary Policy Meeting Minutes
Tuesday, February 21
4:30pm AUD RBA Gov Lowe Speaks
Wednesday, February 22
4:30am GBP Second Estimate GDP q/q
8:30am CAD Core Retail Sales m/m
2:00pm USD FOMC Meeting Minutes
Thursday, February 23
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories
5:30pm AUD RBA Gov Lowe Speaks
Friday, February 24
8:30am CAD CPI m/m