The U.S. dollar bull run could be over in 2018. The world reserve currency has been strengthening throughout the whole year with a couple of healthy retracements. However, the last week’s events have several preliminary signs of the trend reversal. Inflation in the United States was the main topic for the financial markets recently, influencing the equities market plunge in October. Consumer price index was published with a weaker-than-expected reading, easing too hawkish rhetoric of the Federal Reserve. Several Federal Open Market Committee members spoke this past week and all of them, including Chairman Jerome Powell, expressed concerns about the global economic growth in the nearest future. The interest rate hike in December is almost a done deal, however, lots of questions were raised about the pace of tightening in 2019. The market expectations for at least two rate hikes by the Fed in the first half of the next year eased, and the attractiveness of the greenback fell compared to its major peers. The volatile price action in equities market was rather on a bullish bias with the risk appetite renewed, pushing the fear-greed barometer to the right side. Major currencies gained strength versus the U.S. dollar, charting technical signs of the trend reversal.
The only exception was the British Pound. Although the Brexit saga headed to its final stage and the UK - EU deal has been announced, GBP/USD was under a heavy selling pressure last week. One of the key events influencing that price action was the resign of Brexit Secretary Dominic Raab, who expressed his disagreement with the May’s deal conditions, underlying that these are not the things British people voted for. The second bird flew from the DUP party side, which announced a confidence vote against Prime Minister in the Parliament next week. Another round of political turmoil is definitely not the thing Sterling bulls were hoping for, so the sell-off in GBP/USD and other currency pairs continued. The economic data was not supportive for the pound as well. The Unemployment rate grew in September, the Consumer Price Index came in lower-than-expected and Retail Sales unexpectedly dropped in October. All those negative factors pushed the Sterling lower towards 1.2800 handle again. Nothing positive to expect for the week ahead as it will be decisive for the British economy in the scope of the Brexit deal and Theresa May’s future as the Prime Minister. However, the cable is one of the currencies able to bring surprises.
In contrast, the single European currency gained strength after testing the year-to-date lows slightly above 1.1200 level. The bearish run on Monday did not have a continuation and two extremely volatile days followed. Bulls took the market under control in the light of reversing greenback, and EUR/USD managed to close the week well above 1.1400, leaving the door open for further achievements on the North. The range of 1.1500/50 does not seem like something impossible for the week ahead. The main reason for such a dramatic change in the downtrend is that investors have changed their sentiment about the attractiveness of the greenback in the scope of Powell’s speech. The Fed Chairman suggested that the regulator would consider slowing down the tightening cycle due to the global economy’s impact on the situation in the U.S. The inflationary pressure is not so scary, as the CPI report showed. Stock indices reversed during the trading week, bolstering the risk appetite which was the negative factor for the U.S. dollar. Euro was also supported by ECB President Draghi’s speech on Friday.
The largest strength was shown by commodity currencies. Australian and New Zealand dollars were buoyant on positive economic data and the U.S. - China trade war speculations. Trump’s administration has changed their aggressive rhetoric after the Chinese side offered several compromise conditions to make a trade deal. Both sides are working hard to implement the deal before G20 summit in Argentina which will take place in two weeks from now. This factor was positive not only for Aussie and Kiwi but also for other emerging market currencies with investors hoping for the global economy avoiding a worst-case scenario of the global trade tensions. One more supportive factor was the growth of commodity prices such as industrial and precious metals. Economic reports from China, the largest market for Australian and New Zealand exports, showed that things are not so bad as it was widely anticipated. AUD/USD and NZD/USD have completed the bullish technical reversal pattern on the medium-term daily timeframe. More strength is likely for the upcoming week.
The Loonie was also going up last week on the greenback’s weakness mostly. However, the pace of the growth was not so sharp as for other commodity currencies. The reason is that the WTI Crude Oil extended its losses on much higher-than-expected inventories in the United States. The report showed a sharp increase compared to the previous periods. The global demand cut added fuel to the fire while OPEC members did not agree on a significant production cut. Iranian Central Bank was shut down from the SWIFT payment system but even that pressure did not stop the black gold bears from further selling pressure on the price. Nonetheless, investors still keep in mind that the Bank of Canada is hawkish and more tightening is expected in the nearest future. BoC Governor Poloz stated that the interest rates should come back to normal levels, reaching the inflation ranges. Two more rate hikes are forecasted at least for the upcoming six months. USD/CAD bounced from the 2-month highs at 1.3267. A bearish continuation is expected with the pair to slide below 1.3000 support level.
Japanese Yen was surprisingly strong this past week despite the risk-on sentiment in equities. The key factor for such a price action was the change in the 10-year Treasury yields after investors realized that the Fed would consider easing the tightening. The expectations of the interest rates differential to accelerate the gap between the U.S and Japan went lower, so a certain part of the fixed-income and borrowed capital market players took profits from longs on USD/JPY. However, many analysts consider that rebound towards 112.80 support as the retracement and USD/JPY should renew its uptrend soon. Traders will monitor the U.S. stock indices for the currency pair direction.