Dollar fall halts on improved US data, but sentiment is still bearish

US dollar weakness continued through the end of July, however the trend was stopped short following this past Friday’s US non-farm payrolls (NFP).

Data showed that payrolls in July increased to 209,000, well above the expected 183,000 and the previous month reading was also revised upwards to 231,000 from a previous 222,000. The unemployment rate tightened to 4.3 per cent with monthly hourly earnings firming at 0.3 per cent as expected, and up from a previous reading of 0.2 per cent. As published last month, any improving US data would spark buying rallies in the greenback and this proved in full flow following the latest jobs report. The US dollar Index rallied more than 0.8 per cent to close the week at 93.42 levels. Despite the blip in sentiment, the dollar remains entrenched in a bearish pattern, consolidating above 15 month lows. Markets will next turn to this Friday’s US inflation release. Due out at 16:30 Dubai time, the report is expected to show price growth at 0.2 per cent month-on-month and 1.8 per cent year on year in July. Along with output figures & employment, inflation has been a key mandate of the Fed (and its forming of future US rate policy) and of the three, inflation continues to lag. A materialisation of the 1.8 per cent reading in July would snap a four-month losing streak - since February this year, US year-on-year inflation has trended downwards from 2.7 per cent to 1.6 per cent in June – and July’s expectations of 1.8 per cent would continue to shore up US Dollar bulls through the first two weeks of August and will keep the index above 92.50 levels. The Dollar remains sensitive to political developments out of Washington – and this will keep any upward moves in check with strong resistance kicking in at 94.33 levels.

After a stellar July in which it posted 30-month highs, the EUR/USD has been held in check through the early parts of August largely due to the strong dollar moves following the US NFP report. Technically, the Dubai Gold & Commodities Exchange (DGCX) euro contract is approaching the lower end of the monthly Ichimoku cloud and this forms the upper resistance for EUR/USD at 1.19 levels through August. Despite The European Central Bank president Mario Draghi’s non-committal body language at the most recent ECB meet, euro longs seem like the most functional option - however, expect to see volatility to pick up the early part of September when the ECB is next set to meet.

Like the euro, the British pound came off multi-month highs to start August. The most recent Bank of England (BoE) rate decision showed an interesting shift in monetary policy committee voting sentiment - two members voted to hike rates while six members voted to hold rates - this was up from the previous month in which the split was three and five. The dovish shift in voting was coupled with the BoE cutting future UK growth rates – growth forecasts for this year were slashed to 1.7 per cent, down from a 1.9 per cent projection in May. For 2018, expectations were cut to 1.6 per cent from a previously expected 1.7 per cent. As the effects of last year’s Brexit vote continue to pan out, the BoE may be in a position to hike rates slightly sooner than their expected third quarter 2018 window as a result of increasing inflation and slowing output. While we expect some pressure for the pound this month, we expect support in DGCX’s pound contract at 1.2930 levels which would give the most value for a short term long strategy. Upsides while be capped at 1.32 levels through August.

And finally, volatility in gold has seen the precious metal oscillate in the channel between 1208 and 1276 on DGCX. Gold will continue to focus on it’s inverse correlation with the US dollar index and we expect to see initial support coming in in the channel between 1240 and 1245, a break of which would expose 1210 levels. On the upside, it seems unlikely gold will have enough steam to break through 1274 levels in the month ahead.

Gaurav Kashyap, Market Strategist at EGM Futures