Dudley Boosts USD, Forbes Says UK Inflation Likely To Move Above 3%


Talking Points:

  • Dollar consolidation continues and sits near top of 1-month range on Dudley comments
  • EUR a “net long” by leveraged funds per CFTC for first time in three years
  • Sterling volatility low for now, unlikely to persist as Brexit negotiations begin in Brussels
  • Sentiment Highlight: IGCS continues to show retail fighting strongest FX – NZD

The dollar downtrend of 2017 has stalled in the last few weeks. While we have seen a recent 2017 low when the Federal Reserve hiked the Fed Funds Rate on Wednesday. However, when looking at the chart, you can see that price has failed to breakdown sustainably since May 22, 20 trading days ago. On Monday, we had permanent FOMC voter and NY Fed President Bill Dudley who communicated confidence that the economic expansion, which does not necessarily have a broad backing from one back macroeconomic health indicator, still has a “long way to run.”

Dollar downside has stalled since May 22; consolidation tends to favor trend continuation

Dudley Boosts USD, Forbes Says UK Inflation Likely To Move Above 3%

On Dudley’s comments, the yields in US Treasuries perked up, which aligned with a firmer USD. However, we continue to keep an eye on the DXY zone of 97.53/78, and a close above this zone would favor a further push higher in the DXY, but the strength of the downtrend continues to favor further downside continuation. Despite the dollar instability, the recent sprouts of DXY strength are most clearly seen vs. JPY.

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Given the heavy EUR weight on DXY, we have also seen a slow-down in EUR/USD ascent since late May. However, while the EUR downtrend seems intact below June 8 high of 1.1269 toward the May 30 low of 1.1110, the CFTC is showing there are Bullish pressures building below the surface. Monday’s drop in EUR/USD aligned with the pop in UST yields on Dudley’s comments. On Friday, the CFTC’s Commitment of Traders report showed that leveraged funds (think hedge funds) are holding a netlong position in the EUR for the first time since 2014, and a break above 1.13 could push EUR to its largest annual gain against the USD since 2007.

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In the UK, formal Brexit negotiations began in Brussels. Implied volatility over the next month remains low when compared to the 2017 range. Of course, it’s difficult to ascertain what will be either the short-term pair or long-term gain from the talks given a large amount of variables without a clear understanding of who will lead the negotiations later this summer and whether the focus will be on a “soft” or “hard” Brexit. In addition to Brexit uncertainty, there were also parting words of warning from Kristin Forbes (one of three decenters last week) who will be replaced in the MPC by Silvana Tenryo starting in July. Forbes said that UK CPI would probably rise above 3%, which, if true, would likely introduce the fear of stagflation where there is stagnant economic growth combined with purchasing power theft of inflation.

Of course, what has put the UK in this position is the aggressive drop in sterling over the last year. We may find if inflation pressures continue, that the BoE will start to push back and we could find a major central bank playing defense where others are beginning to play offense, which would likely aggressively lift volatility.

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Closing Bell’s Top Chart: June 19, 2017, UST 10Yr Yield at confluence of support – Trendline + 38.2% Fibonacci Retracement

Dudley Boosts USD, Forbes Says UK Inflation Likely To Move Above 3%

Chart Created by Tyler Yell, CMT

Next Week’s Main Event:CB Speaker’s abound on Tuesday:

  • GBP BOE’s Carney speaks at Mansion House event in London
  • CNY PBOC Governor Zhou Xiaochuan Speaks in Shanghai
  • CHF SNB’s Jordan Speaks in Bern

IG Client Sentiment Highlight:IGCS continues to show retail fighting strongest FX – NZD

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

Dudley Boosts USD, Forbes Says UK Inflation Likely To Move Above 3%

NZDUSD: Retail trader data shows 16.4% of traders are net-long with the ratio of traders short to long at 5.09 to 1. In fact, traders have remained net-short since May 24 when NZDUSD traded near 0.69347; the price has moved 4.4% higher since then. The number of traders net-long is 5.1% higher than yesterday and 19.6% lower from last week, while the number of traders net-short is 18.6% higher than yesterday and 44.2% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZDUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bullish contrarian trading bias.(Emphasis mine)

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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