US Dollar Outlook, Week Ending 11/3

I'm making a post strictly for the U.S. Dollar this coming week because it seems we're approaching a possible inflection point for the currency. Technical indicators suggesting the dollar's recent rally is looking a bit hot, combined with a week of important economic data, suggest a selling opportunity for the dollar may be imminent.

Source: investing.com

A look at movements in the dollar index futures suggest some further strengthening in the currency is seen for the first day of the workweek, with Asian/Pacific trading starting to rev up as I type this (8:10pm Central Time). Since a relative nadir on October 11th, the dollar index has risen by nearly two index points, from 92.83 to 94.75. The biggest day of gains came on October 26th, with a jump of 1.01 index points. Needless to say, we've been in a bit of an uptrend over the last couple of weeks.

Source: investing.com

From a technical vantage point, the recent dollar rally has flipped the script from what we saw over the summer and earlier this fall, when the dollar was encountering one of its weakest periods in years. Both the pound and euro are starting to look a little too weak against the dollar right now, especially with EUR/USD dipping just barely below 1.16 in early trading to start this workweek.

Source: tradingeconomics.com

In terms of economic data, this week is looking to be a pretty significant one for the U.S. Seen among the high-impact data releases this coming week are a FOMC decision on Wednesday, where expectations are for the benchmark federal funds rate to be held steady at a range of 1.00% to 1.25%.

Source: CME Group

The big question for this meeting is going to be how policymakers view the likelihood of a December rate hike. As shown to the right, market participants view the probability of a rate hike at this week's FOMC meeting as practically nonexistent, but are pricing in a 97.2% chance of a 25 basis point hike in December. In other words, markets are viewing a December rate hike as all but certain, which leaves little room for any big upside dollar moves from this meeting. Instead, any hint of a more dovish shift in FOMC thinking on a December rate hike could hit the dollar and put an end to this recent uptrend.

The Federal Reserve has indicated they are taking into account the behavior of financial markets in their decisions- of course, to what degree is uncertain, but I would be surprised if there was to be any dovish shift. By historical valuations, stocks are indeed expensive, and I personally see the Federal Reserve as willing to turn a blind eye towards soft inflation and hike rates once or twice more to keep a very strong labor market and a frothy stock market in check. This was put on display a bit in the last few months when traders saw Federal Reserve chair Janet Yellen point to a December rate hike as more likely than previously thought.

The fun doesn't stop there, however. The employment report hits the newswires on Friday, 11/3, and everyone will be watching both the unemployment numbers and any hints of wage gains. Similar to last month, job gains numbers (currently forecasted at or over 300,000 jobs) could be volatile as businesses likely bounced back strongly in October after being hit hard in September from two major hurricanes.
Since this could be another volatile report, it wouldn't surprise me to see this week's USD direction be established by the midweek FOMC meeting. As that last sentence implies, though, the potential volatility of the report could also be a scene-setter, but we'll have to wait and see if that actually ends up being the case.

To summarize:

- Watch the 11/1 FOMC report for hints of a more dovish approach to monetary policy- market participants are nearly fully pricing in a December rate hike and USD could become vulnerable in a change of thinking.
- The possibility of another NFP report missing or beating forecasts by a large margin, like last month, is a source of uncertainty and will likely help set the tone for the week's performance of the dollar.

Andrew

Testing Technical Analysis

I’ve finally managed to recover from the worst of my illnesses, after getting a fresh round of antibiotics to take care of something called ‘hemophilus influenzae’ that was making things pretty unbearable for a while. As I type this on this Wednesday, the third week anniversary of when I first went in to the doctor for an illness, I’m still stuck with a cold, but I am feeling far better than before.
The same cannot be said for financial markets in the last couple of days. Between the GBP/USD flash crash and continued weakness and stocks taking a nasty hit on Tuesday, I imagine there’s an abundance of Advil circulating around trading floors. If technical analysis is to be believed, painkillers could soon be flying off the shelves.

Bloomberg

Let me first assert that, as a college student, I’m not going to pretend like I know what I’m saying is completely accurate. I’m more or less learning as I go, and there’s bound to be times where I say one thing and the complete opposite happens. Caveats aside, above is a screenshot of the Dow Jones Industrial Average from Monday with a bearish pennant formation. This pennant is bearish as per the 2.88% contraction (flagpole) around the early part of September, which kicked off the pennant formation. The Dow fell 200 points on Tuesday, and as of this typing, is up about 34 points on this Wednesday at 18,163 points. Needless to say, Tuesday’s big drop was the downward breakout point for the Dow we were looking for. The drop came on the heels of uncertainty over the OPEC “deal”, a surging Dollar, and general anxiety over market volatility, certainly not helped by the Cable flash crash earlier. While conditions today (10/12) are slightly better and major indices are showing modest gains, DJIA remains below the pennant’s line of support. I’ll be watching carefully in coming days to see if this line of support is treated as a new line of resistance, or if markets rally and the pennant formation was likely a false alarm. Only time can tell.

Bloomberg

I’m not too convinced that this is just a flash in the pan with respect to the pennant formation yet. The S&P 500 has been exhibiting the same kind of bearish pennant formation as the Dow, with a drop of ~60-70 points at the flagpole. As a result of Tuesday’s sell-off, this pennant too was broken, and again I’m watching carefully to see if this holds and the index remains at subdued levels relative to what we saw in the pennant.

Bloomberg

The ‘kicker’ to me is a strong bullish pennant formation we saw in the VIX. This formed at the same time as the S&P 500 and Dow pennants, though this flagpole was bullish with a 71.47% gain in early September. Tuesday’s sell-off saw this pennant broken, and the VIX stands at 15.71 as of this typing (Wednesday). With the VIX pennant broken in an upward movement as expected, the idea that the bearish pennants in DJIA and SPX were valid gains traction. Again, it’ll take a couple more days to see if this is actually true, but things are certainly looking that way.

Ideally, I’ll be over this cold in the next couple days and I can finally have a day where I’m not sick with anything. That day should come very soon, but if technical analysis is to be believed, the same cannot be said for stocks.

Andrew