As I wrote before in greenback review ahead of Yellen speech in Jackson Hole, US Dollar index had a strong resistance at 95.00 level, which though, has been successfully cut through as the rate hike outlook bas picked up considerably based on Yellen upbeat comments:
Yellen’s key phrase “the case for an increase in the federal-funds rate has strengthened in recent months” mentioned in her speech basically allows to assume at least one rate hike is almost guaranteed this year. The confidence can be probably eroded only in case next payrolls and wagers data post extraordinary declines what is unlikely to break sustainable buoyancy on the US jobs market.
December odds of 25 bp rate hike now outweigh the likelihood of no changes, while September possibility rose to 33%:
Early rate hike is fraught with high stagnation risks if economy is not “heated” enough to develop further with high borrowing costs. Increased interest rate also hits earnings of large corporations as well as lead to a cutdown in investments to the low-yield assets. On a positive side, Fed intentions to tighten monetary policy improve projections on US economy growth in the long-term what will overlap potential negative medium-term impact on stock markets.
The yield on US Treasuries rose as investors drop low-yield gov. bonds, a usual pattern demonstrating inverse relationship between rate hike expectations and bond market:
As the FED rate hike becomes more or less certain in this year and could be already priced in in US Dollar, the question remains open if the central bank will go for a second rate hike. September rate futures estimate 33% probability of the increase while markets focus on August Non-Farm Payroll report which positive figures can boost the odds even more. The report is expected to extend positive streak so upbeat expectations will probably push greenback higher throughout the week.
Based on these views we can form next trading calls:
The pair will probably extend declines to 1.11 level on Dollar strengthening paring down monthly gains and will stall around support area till NFP release.
Trading call: Sell EURUSD, Target – 1.1090, SL – 1.1255, Preferred Lot size – 0.4 lot.
The bounce from 100 psychological support area has a good odds to be extended to 103.50 level.
Trading call: BUY USDJPY, TP – 103.50 , SL – 101.80. Preferred lot size 0.3 lot
The picture on Gold remains quite mixed: on the one hand, bullion dropped to one-month support and has a good chances to pare down declines ahead of NFP uncertainty, but on the other strong Dollar can curb the growth. I would suggest to join bulls camp with a small lot, expecting rebound from support levels.
Trading call: Buy XAUUSD, Target – $1,340, SL – $1,305. Lot size – 0.1 lot.
That’s all for today. Looking forward to see your comments and questions in facebook box.