Following the FOMC statement last Wednesday evening, the currency markets are generally lacking direction and this is showing no signs of settling down quite yet. The USD can be still be seen suddenly alternating between bullish and bearish momentum, which has resulted in other currencies experiencing more fluctuations than you would normally expect during the beginning of the week.
The only consistent movement so far today has been WTI Oil, which has slipped from Friday’s high at $47.38 to $45.32 following comments from Saudi Arabia’s Oil Minister, Ali Al-Naimi, that Saudi Arabia will not stand alone in cutting production. In truth, the USD weakness last Wednesday was extremely well-timed for the oil bulls because the commodity was at extremely high risk of extending below the $42 area that would have sent shocks throughout the financial markets and probably alerted the bears to squash prices even further. The oversupply in the markets is severe and probably growing even larger by the week. Unless the USD continues to be sold, WTI will still face significant downside risks and it wouldn’t surprise me if traders look to re-test the $42 area in the days ahead.
Switching back to the USD softness, I can understand why the FOMC seized on the chance to pause the outstanding USD run of momentum because it was getting to the point where if the USD bulls charged any further, it would have become very difficult to pinpoint a limit to the USD strength. No one should really be surprised that the Federal Reserve reiterated that it would remain in no hurry to begin raising interest rates, and it should be clearly remembered that the Fed were reluctant at times to even to begin tapering QE.
Regardless of the FOMC being in no hurry to raise interest rates, the USD will remain attractive for investors because the Fed will still raise interest rates before the overwhelming majority of central banks can even contemplate the idea. The 8-month USD uptrend is also seen as being completely supported, and it will only be at risk if suspicions arise that the Fed will not raise interest rates at all this year. In regards to when the Federal Reserve will be raising interest rates, the markets are going to be looking closely at this week’s inflation data for clues. It should also be remembered that the Fed were explicit in indicating that an interest rate hike is data dependent, therefore this Friday’s GDP data will provide some weight in the decision making. If the GDP gets revised lower once again, I would expect interest rate expectations to be pushed further back until later in 2015.
Gold is one of the few instruments that has commenced the week quietly, which is largely because it is waiting for key data to be released from the United States to determine its next direction. After hitting a four-month low at $1142 earlier last week the metal has rebounded to the $1180’s and is currently consolidating around this level. If the US economic releases continue to indicate that the Federal Reserve will remain in no hurry to raise interest rates, I can see Gold making an attempt to re-enter the $1200’s. Apart from this, the upside potential is limited and would likely only extend significantly if suspicions arise that the Fed will postpone raising interest rates.
The Eurodollar provides the greatest example of a currency pair that has struggled to find direction today with the EURUSD transitioning from hitting a low at 1.0767 a few hours ago, to rebound back towards 1.0895 at the time of writing. With the upside gains over the past couple of days being correlated to USD softness and the ECB recently launching QE, traders could be looking at a potential opportunity to sell on rallies. The EU fundamentals remain bleak and the complete divergence in both economic and monetary sentiment between the US and Europe is obvious to traders. Reports are also circulating that Athens is close to running out of money and such a situation is sure to weigh on investor sentiment.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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