Weekly Outlook: 2015, March 22 - 29

Forex Weekly Outlook March 23-27

Inflation data in the UK and the US, housing data from the US, German Ifo Business Climate, US Core Durable Goods Orders, Us Unemployment Claims and Stephen Poloz’ speech. These are the highlights of this week. Follow along as we explore the Forex market movers.

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Last week, The Federal Reserve removed the word “patient” from its policy statement, increasing the odds for a rate hike in the coming months. However, the Fed also downgraded its economic growth and inflation projections. The Policy makers’ rate hike decision depends on mixed economic data, on one-hand strong job gains and robust consumer demand, while on the other hand, falling oil prices and a strong dollar, reducing exports and lowering inflation. Will the Fed raise rates on its June meeting?

1. Mario Draghi speaks: Monday, 14:30. ECB President Mario Draghi will testify before European Parliament’s Economic and Monetary Affairs Committee, in Brussels. He may talk about the new QE program aimed to boost growth in the euro countries and about his growth prospects for the bloc. Market volatility is expected.
2. UK inflation data: Tuesday, 9:30. UK inflation declined to the lowest level on record, reaching 0.3% in January, compared to 0.5% in December 2014, amid a sharp depreciation in global oil prices as well as falling food costs. Most economists were not concerned about this drop since core CPI excluding the more volatile prices such as food and energy actually rose to 1.4% in January. Inflation is expected to decline further to 0.1%.
3. US inflation data: Tuesday, 12:30. US consumer price index declined 0.7% in January after dropping 0.3% in November and December. Energy prices shed 9.7% while the gasoline index plunged 18.7%. However, excluding the volatile food and energy sectors, core inflation increased 0.4% in January and over 2% on a yearly base. However, economists believe the subdued inflation is temporary held down by the sharp fall in oil prices. Analysts expect consumer prices to gain 0.2%, while core prices to increase by 0.1%.
4. US New Home Sales: Tuesday, 14:00. New U.S. single-family home sales declined only mildly in January, reaching 481,000 from 482,000 in December, despite bad weather conditions in winter. Economists expected a decline to 471,000 in January. Analysts believe the housing market will continue to recover in the coming months due to stronger employment data. US new home sales are expected to reach 475,000 in February.
5. Eurozone German Ifo Business Climate: Wednesday, 9:00. German business sentiment improved in February to 106.8 from 106.7 in January. The reading was below market expectations, but the continuous growth suggests rising confidence in light of economic growth and optimism over European Central Bank stimulus. German growth was boosted by lower oil prices as well as a weaker euro. However, the Greek ordeal still clouds business sentiment. Business climate is expected to rise further to107.4.
6. US Core Durable Goods Orders: Wednesday, 12:30. Orders for durable goods edged up in January for the first time in three months, rising 2.8% suggesting the manufacturing sector is stabilizing. The reading was higher than the 1.7% increase forecasted by analysts and was preceded by a 3.3% fall in December 2014. Meanwhile Core durable goods orders excluding transportation items increased 0.3%. Durable goods orders are expected to gain 0.6%, while core orders are predicted to rise 0.5%.
7. US Unemployment Claims: Thursday, 12:30. The number of Americans filing new claims for unemployment benefits increased by 1000 last week, reaching 291,000, indicating the job market remains strong. The four-week moving average, rose 2,250 to 304,750 last week. Despite some volatility, the number of claims still indicate a growth trend in the US labor market. The number of jobless claims is expected to reach 295,000 this week.
8. Stephen Poloz speaks: Thursday 13:30. BOC Governor Stephen Poloz is scheduled to speak at a press conference in London. Poloz may refer to the recent BOC surprising rate cut decision, following the global oil price crush and its possible effect on the Canadian economy.
9. US Final GDP: Friday, 12:30. Following an incredible growth rate of 5% in the third quarter of 2014, the last three months of 2014 are expected to be much weaker. According to the preliminary GDP reading for the fourth quarter, growth reached 2.2%. Analysts expect the final reading to be 2.4%.
10. Janet Yellen speaks: Friday, 19:45. Federal Reserve Chair Janet Yellen will speak in San Francisco and talk about the Fed’s monetary policy. On the last policy meeting the Fed omitted the word “Patience” from the statement, preparing markets for a near rate hike despite lowering its forecast on growth and inflation. Market volatility is expected.

Fundamental Forecast for Dollar: Neutral

• Though the FOMC removed its ‘patient’ term – interrupted as a cue for a possible June hike – the Dollar slipped
• Fed Fund futures now see the first rate hike not until November (there are meetings on Oct 28 and Dec 16)

Attachment 12435

The Federal Open Market Committee (FOMC) meeting this past week certainly set off fireworks in the financial market. Yet, the outcome didn’t follow the simple path rate watchers would have expected. Now, with volatility further magnified; we find the Dollar wavering on its record-breaking, eight-month bull trend. Did the market overshoot on its speculative forecast for the Greenback before the central bank clarified its position – either pricing in a faster pace than was reasonable or perhaps pushing more premium than just the monetary policy differential would confer? Have the speculative ‘weak hands’ already been flushed from the system? And, will risk trends start to contribute to the curerncy’s fundamental picture in the near future?

Looking back at the Fed meet this past week, there weren’t many ‘surprises’. The headlines were focusing in particularly on whether the group would include or strike the term ‘patient’ in reference to their timing for normalizing monetary policy. It was popularly understood that the word was equivalent to a more than three-month time frame before the central bank would consider a rate hike. Having been removed, the ‘mid-2015’ (some say June) first rate hike is more probable.

Another meaningful change was the downgrade in growth, inflation and interest rate forecasts. In their updated forecasts, the Committee lowered a the 2015 GDP view to 2.3 – 2.7 percent (from 2.6 – 3.0), the 2015 inflation range to 0.6 – 0.8 percent (from 1.0 to 1.6) and December’s expected benchmark rate level to 0.625 percent (from 1.125). These are significant changes that could lower the ‘curve’ (or projected pace of tightening), but there was limited speculation of a swift pace to begin with. Furthermore, the moderation in this data does little to offset the communication effort by the Fed to acclimatize the market to an approaching hike. And yet, timing of the first hike assessed by Fed Funds futures was pushed even further back, to November.

The Dollar’s waffle after the policy update is likely a flush of an excessive market exposure. We’ve seen the currency far outpace other markets that are theoretically connected to rate forecasts (Treasury yields, Fed Fund futures, monetary markets). Having established such a remarkable and obvious trend, it is likely speculative interests that fell outside of the fundamental rational were drawn in. With the policy update, those focused on short-term momentum were easily shaken. The question is whether the excess has been worked from the market. Wednesday’s tumble was severe in both price and volume, but it didn’t even break the USDollar’s 8-month trend.

There is likely a large pocket of tactical traders who would quickly abandon the Dollar long view should it slip further or even stall for an extended period. Yet, despite the risk of a short-term long squeeze, the fundamental backdrop would still support the medium-term bullish lean for the currency. Whether the Fed realizes a hike in June or October, its hawkish view – much less its timing – is far more incisive than its counterparts.

What is perhaps even more remarkable from this past week, was the swell in risk appetite following the Fed decision. Even a delay to the start of a tightening regime still clarifies the central bank’s ability and intention to raise rates. That reverses a course of years of increasing accommodation to draw risk out of the market and encourage investing. Yet, to a market with an increasingly shorter time frame for positioning, it offers a quick opportunity. The trouble is, what will the mentality be after that speculative swing is over? For milestones to gauge policy and risk trends moving forward; watch event risk such as the CPI data, the laundry list of Fed Speeches (including Yellen’s address on Friday) as well as international topics – like Greece’s financial problems.

the source

Fundamental Forecast for Japanese Yen: Neutral

• The Weekly Volume Report: FOMC Sparks Volume Surge
• USD/JPY At Important Technical Juncture

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In light of the market reaction to the Federal Open Market Committee’s (FOMC) March 18 meeting, the fundamental developments coming out of the world’s largest economy may continue to dictate the near-term price action for USD/JPY as Janet Yellen and Co. shows a greater willingness to retain the zero-interest rate policy (ZIRP) beyond mid-2015.

With that said, a slowdown in Japan’s Consumer Price Index (CPI) may have a limited impact on the dollar-yen especially as the Bank of Japan (BoJ) largely endorses a wait-and-see approach, while the U.S. data prints may foster increased volatility in the exchange rate as market participants continue to speculate on the Fed’s first rate hike. An uptick in the core U.S. CPI paired with an upward revision in the 4Q Gross Domestic Product (GDP) report may heighten the appeal of the greenback, but the disinflationary environment may become a growing concern for the central bank as the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for price growth, is expected to slow to 1.1% from 1.4% in the three-months through September.

The fresh forecasts coming out of the central bank suggests that FOMC will further delay its normalization cycle as the committee pushes out its interest rate dot-plot, and the Fed may sound more dovish heading into the second-half of the year amid the uncertainties surrounding the global economy. In turn, the dollar remains at risk of facing additional headwinds over the coming months, and the near-term pullback may ultimately turn into a larger correction should the U.S. data prints fail to meet market expectations.

As a result, the near-term topping process around the 122.00 handle may pave the way for a further decline in USD/JPY, and the pair may continue to give back the advance from earlier this year as the Relative Strength Index (RSI) fails to retain the bullish trend carried over from back in January. The downside break in the oscillator favors the approach to ‘sell bounces’ in the dollar-yen, but the pair may face choppy price action going into the key event risks as market participants continue to digest the latest developments coming out of the U.S.

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Fundamental Forecast for British Pound: Neutral

• British Pound tumbles as Bank of England chief economist warns an interest rate cut is possible
• One-sided sentiment warns of further GBPUSD weakness

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The British Pound showed signs of life as it rallied for the first week in three versus the US Dollar, but concerns over the future of UK interest rates may continue to weigh on the domestic currency through the foreseeable future.

Last week we wrote it would be a pivotal stretch for the UK currency versus the US Dollar, and indeed surprises from the US Federal Reserve forced a major correction in all major USD pairs and pushed the GBP/USD off of its lows. Disappointments in UK economic data nonetheless held the Sterling back from larger gains and set the stage for another important week ahead.

The combination of UK Consumer Price Index inflation data and Retail Sales growth results promise continued volatility in the GBP and could ultimately set direction through the end of March. CPI figures in particular could have a material impact on expected Bank of England interest rate policy and by extension the GBP. And indeed, traders punished the British Pound as Bank of England chief economist Andrew Haldane unexpectedly told investors that the next policy move could in fact be an interest rate cut.

The surprising statement puts Haldane at odds with BoE Governor Carney who recently said it would be “extremely foolish” to cut interest rates now. As things stand, Haldane seems to be the sole voice in the 9-member Monetary Policy Committee to see a rate cut as a distinct possibility. Yet the market reaction was unambiguous: UK 2-year government bond yields tumbled to fresh monthly lows, and the British Pound moved in kind. Recent 1-week performance in major currencies matched changes in interest rate expectations with near-perfect accuracy and underlined the significance of future moves.

At the risk of coming off as hyperbolic and repetitive, we believe it is shaping up to be yet another pivotal week for the British Pound. The GBP/USD finished modestly higher this past week only because the US currency saw a much larger correction in yield expectations. Major reactions to surprises in CPI inflation and Retail Sales figures could ultimately determine broader direction in the UK currency.

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Fundamental Forecast for Australian Dollar: Neutral

• Australian Dollar Looks to Evolving Fed Policy Bets for Direction Cues
• Soft Chinese Manufacturing PMI May Limit Scope for Aussie Recoverys

Attachment 12438

The Australian Dollar mounted a spirited recovery last week, rising 1.8 percent against its US counterpart to record the best performance in a month. Fading Federal Reserve rate hike expectations appear to be behind the Aussie’s rebound, with the currency rising from a multi-year low alongside moderation in priced-in expectations for where the Fed funds rate will be by the end of the year (as telegraphed in futures contracts).

A near-empty domestic economic calendar is likely to keep external factors at the forefront in the week ahead. Last week’s FOMC policy announcement and subsequent clarifying remarks from Fed officials (most notably from Dennis Lockhart, the President of the central bank’s Atlanta branch) suggest the decision on rates “liftoff” will now be made on a meeting-to-meeting basis. This makes for a data-sensitive environment in the near term.

February’s US CPI figures take top billing. The core year-on-year inflation rate is expected to rise to 1.7 percent, marking a three-month high. US price-growth data has increasingly underperformed relative to consensus forecasts since mid-2014 however, suggesting analysts’ models have tended to overstate inflation and opening the door for a downside surprise. Such an outcome may further erode Fed tightening bets, offering the Aussie a further boost.

A wealth of scheduled commentary from key Fed officials will likewise inform investors’ outlook. Remarks from FOMC committee members Williams, Evans and Lockhart as well as Fed Vice Chair Fischer and Chair Yellen are all due to cross the wires. Needless to say, the markets will be keen to get further clarification on the prevailing timeline for the onset of stimulus withdrawal. Rhetoric pointing to cooling conviction on a mid-year rate hike is likely to help the Aussie recovery continue.

HSBC’s Chinese Manufacturing PMI print is a wild card. The release is expected to show factory-sector activity slowed in March, hitting a two-month low. The Aussie has tracked eroding 2015-16 Chinese GDP forecasts downward since mid-2013. This warns that signs of sluggishness in the Oceanic country’s top export market may push the RBA policy outlook deeper into dovish territory and weigh on the exchange rate. Markets now price in 50bps in easing over the coming 12 months.

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Fundamental Forecast for Gold: Bullish

• Bullish USD Outlook Mired Post FOMC- JPY, GBP & Gold in Focus
• Gold 1200 Would be a Big Test

Attachment 12439

Gold prices are sharply higher this week with the precious metal advancing 2.14% to trade at 1183 ahead of the New York close on Friday. The advance comes on the back of the FOMC policy meeting where Yellen and company talked down expectations for a mid-2015 rate hike with the central bank lowering expectations for growth and inflation. The release prompted a massive bout of profit taking on the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker: USDOLLAR) marking its single largest weekly decline since August of 2013 as Gold rebounded off a critical weekly support range.

Even though the FOMC removed the ‘patience’ language from the forward-guidance, the updated projections coming out of the central bank dragged on the dollar as Fed officials pushed back their interest rate forecast. Indeed, the downward shift in the interest rate dot-plot raises the risk of seeing the Fed retain the zero-interest rate policy (ZIRP) into the second-half of the year, with the normalization cycle likely be on a more gradual trajectory. Accordingly, the USD may get a brief respite from its recent rally with gold set to stage a near-term recovery amid softer interest rate expectations and a subdued outlook for inflation.

Looking into next week, traders will be closely eyeing key US data points with the Consumer Price Index (CPI), Durable Goods Orders & the final read on the 4Q Gross Domestic Product (GDP) report on tap. Despite the cautions tone laid out by Chair Yellen, stickiness in the core rate of inflation along with an upward rising in the growth rate may cap dollar-losses in the days ahead as market participants now anticipate the central bank to take a softer approach in the normalization cycle.

From a technical standpoint, gold has now rebounded off the key support region we’ve been noting over the past few weeks at 1150/51. Price action this week completes a sizeable key outside reversal candle off of a critical support region with the rally taking prices briefly through the 23.6% retracement of the decline off the January highs at 1181 before settling just below. Look for near-term support at 1167/68 which is defined by the March 18th reversal-day close & the January stretch low.

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The Nikkei as you can see had a very positive week, closing above the ¥19,500 level. With that being the case, we can pull back from here we think that there will be plenty of value to be found, and we of course would be buyers. We still believe that the Nikkei goes to the ¥20,000 level given enough time, so obviously we don’t have any interest in selling. The Bank of Japan continues to offer liquidity, which of course will be supportive of the market. We believe the ¥20,000 will eventually give way to the buyers and offer a longer-term buy-and-hold scenario as well.

http://youtu.be/cx__sSTyxrk

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The DAX went back and forth during the course of the week, ultimately showing a bit of exhaustion. We don’t necessarily have a negative candle though, so really at this point time we believe that a pullback is probably going to be in the cards. We also recognize it as potential value, as the market most certainly is bullish overall. However, we are overbought so we look at pullbacks as potential buying opportunities. We have no scenario in which we are comfortable selling the DAX as it has been so strong.

http://youtu.be/NloZswKyOio

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The NASDAQ as you can see broke higher during the course of the week, making fresh, new highs. We got above the 5000 level finally, which of course is a very bullish sign. With this, we believe that pullbacks continue to offer value, and that the market should continue to go much, much higher. We think that the 5000 level should offer a bit of support going forward, and most certainly the 4800 level well. Selling isn’t even a thought at this point in time as the uptrend is so well entrenched.

http://youtu.be/F7OqsfeCjpU

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The S&P 500 broke higher during the course of the week, clearing the 2100 level. That being the case, the market looks as if it is ready to continue going much higher, as we are about to make a fresh, new high. Once we do, we feel that this market will just simply continue the upward grind that it has been in for some time now. This is a nice uptrend, and of course has been very steady and therefore we are very bullish of the S&P 500 going forward.

http://youtu.be/aZTigPm1Gbo

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