We welcome you to this new trading week which will be an important one for both the U.S. dollar and the British pound. The dollar trade received a boost from fresh hopes for an expansionary fiscal push that could boost inflation and thus, pave the way for a steeper Federal Reserve tightening cycle. The greenback advanced against its major counterparts and as long as the market remains driven by the progress on tax reform, we may see another round of dollar strength in the near-term. Apart from the pace of progress on tax cuts, President Trump is set to announce his pick for the next Fed Chair by mid-week. Governor Jerome Powell is said to be the front-runner.
With the U.S. monetary policy remaining the most interesting issue for investors, this week’s focus will be on the FOMC rate decision (Wednesday). While the Fed is expected to be on track for a rate hike in December, Wednesday’s FOMC statement is not expected to reveal anything new in this respect. However, favorable headlines and upbeat economic data could further strengthen the greenback. The most interesting piece of U.S. economic data will be the employment report for October due Friday but traders should also pay some attention to the Fed’s favored inflation gauge, the PCE deflator, scheduled for release today at 12:30 UTC.
The second most important risk event this week will be the Bank of England’s “Super Thursday”. On Super Thursdays the rate announcement is accompanied by the publication of the meeting minutes and of the BoE’s Quarterly Inflation Report. The central bank is widely expected to double the interest rate to 0.5 percent but since this step is already priced-in into the pound’s price action, the risk is slightly tilted to the downside. The probability of a BoE rate hike on Thursday is currently around 88 percent and while this assumption should be positive for the pound there is speculation that it will be a “one and done” rate hike. To sum up, there is a substantial amount of risk potential in the market and sterling traders should prepare for volatile swings this week.
The pound drifted lower on the back of a strengthening dollar but found some halt at 1.3070. Looking at the technical picture, we still see the cable consolidating between 1.3340 and 1.3030 and as long as this range remains intact the current trend could be considered sideways.
The euro tested the falling trend line of its current downtrend channel from where a small pullback occurred. Based on that channel we may now see further upward movements towards 1.17/1.1730 and possibly even 1.18. If the euro however falls below 1.1550 we expect further losses towards 1.1480 and 1.1380. In terms of the longer-term outlook, we bear in mind that the fact the ECB is still far from hiking interest rates and the political developments in Spain with the recent friction in Catalonia will have no positive effect on the single currency. In a nutshell, further losses are currently more likely rather than a continuation of this year’s uptrend.
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