DERBYSHIRE GB / SEPTEMBER 3rd, 2023 - The week ahead may see a break for the dollar bears although the bulls are likely to eventually regain strength. The next update is planned to be published after the US Trade Balance and PMI on Wednesday, September 6th or before if any significant event occurs.
CME Group 30-Day Fed Fund futures
Sentiment towards interest rates in the US have softened following the labour report on Friday which showed unemployment to be rising more than anticipated.
September favours a hold and odds have risen to 94% from 88%. A 0.25 hike chance has fallen to 6% from 12%.
November favours a hold and odds have risen to 65% from 52%. A 0.25 hike chance has fallen to 33% from 44%.
US Dollar Strength May Soften Although Bulls Are Expected to Return
Macroeconomics suggest that the outlook for the US dollar is weighted in favour of the bulls. Dollars are in demand due to interest rates remaining higher-for-longer and safe-haven in-flows when risk aversion increases as the war in Ukraine progresses as well as the China-US trade war.
The direction of the US Dollar Index supports the macroeconomic bullish outlook as the index recently bounced off a key fibonacci support level to climb 1.0%. This move was influenced by last week’s unexpected jump in unemployment which rose to 3.8% during August. However, other market indicators are showing a more uncertain outlook as the US stock index S&P 500 as well as the yield on six-month treasury bonds remained steady.
The upcoming week could soften the bullish outlook of the dollar, as data releases may show a slowing economy and weaken the case for high interest rates. On Wednesday, both the balance of trade and the ISM Services PMI are expected to show a slight deterioration. However, be cautious as speeches throughout the week from Fed officials may see them talk up their hawkish monetary policy rhetoric.
The week after could strengthen the bullish outlook of the dollar, as the Consumer Price Index report for August is expected to show a rise in inflation from 3.2% to 3.4% (Trading Economics forecast), which would warrant interest rates remaining higher for longer.
Euro Weakness May Stabilise Ahead of ECB Meeting
Macroeconomics suggest that the outlook for the Euro is weighted slightly in favour of the bears. Euro’s are lacking in demand due to potentially higher interest rates that are slowing the economy as well as safe-haven out-flows when risk aversion increases as the war in Ukraine progresses.
The direction of the EUR/USD supports the macroeconomic slightly bearish outlook as the pair recently dropped from a key fibonacci resistance level to fall 1.0%. This move was influenced by last week’s unexpected jump in CPI which rose to 5.3% during August. Other market indicators are also showing a slightly bearish outlook as the German stock index DAX as well as the yield on six-month bunds remained steady.
The upcoming week could strengthen the slightly bearish outlook of the euro, as data releases may confirm a slowing economy. On Monday, ECB president Lagarde is due to speak in London and may talk up the hawkish monetary policy rhetoric followed by a likely weak retail sales report on Wednesday followed by the final estimate of GDP growth rate on Thursday.
The week after could weaken the slightly bearish outlook of the euro, as the ECB Governing Council meeting is expected to hold interest rates at 4.25% (Trading Economics forecast) although they are unlikely to signal any future cuts.
Pound Weakness Has Little Reprieve In Sight
Macroeconomics suggest that the outlook for the Pound is weighted slightly in favour of the bears. Pound’s are lacking in demand due to potentially higher interest rates that are slowing the economy as well as safe-haven out-flows when risk aversion increases as the war in Ukraine progresses.
The direction of the GBP/USD supports the macroeconomic slightly bearish outlook as the pair recently dropped to retrace its uptrend, falling 4.25%. This move was influenced by last week’s unexpected jump in US unemployment which rose to 3.8% during August. However, other market indicators are showing a more mixed outlook as the UK stock index FTSE 100 as well as the yield on six-month gilt bonds remained steady.
The upcoming week has little economic events that could affect the slightly bearish outlook of the pound, although it may be somewhat subdued as the dollar potentially takes a bullish break due to its data reports indicating a slowing economy and a need for lower rates. However, be cautious as speeches throughout the week from Fed officials who may talk up their hawkish monetary policy rhetoric could put pressure on the value of the GBP/USD.
The week after has the UK unemployment rate and GDP data on the radar although it's too early to forecast. However, there is the potential for a weaker GBP/USD as the outlook for the dollar is likely to strengthen the bulls as the Consumer Price Index report for August is expected to show a rise in inflation from 3.2% to 3.4% (Trading Economics forecast), which would warrant interest rates remaining higher for longer.
Gavin Pearson
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