By Lukman Otunuga, Research Analyst at FXTM
The United States Dollar edged higher against a basket of currencies on Tuesday with prices stabilising above 100.00 as investors adopted a defensive stance ahead of next week’s FOMC meeting. With the CME Fed watch tool displaying a healthy 94.9% probability of an interest rate increase this month, much attention may be directed towards the intensity of rate hikes in 2017. As the year slowly comes to an end, Federal Reserve (the United States’ Central Bank) members have repeatedly expressed their optimism about the health of the US economy while positive domestic data continues to bolster sentiment that the United States economy, the largest in the world, would experience growth under Donald Trump – the US president-elect.
November’s Trump effect still fuels the Dollar with optimism over Donald Trump implementing fiscal stimulus measures reinforcing expectations of an improvement in overall US GDP. A strong rise in inflation from healthy growth could force the Federal Reserve to raise US interest rates aggressively in an effort to prevent the economy from overheating.
Dollar bulls remain in firm control amid the encouraging outlook towards the US with further appreciations expected as domestic data continues to exceed estimates. From a technical standpoint, the Dollar Index is bullish on the daily timeframe and a breakout above 101.00 could encourage a further incline higher towards 102.00.
Sterling was exposed to heavy losses on Wednesday following the UK’s disappointing Industrial Production data which exacerbated the ongoing Brexit concerns. Industrial production fell 1.3% in October while manufacturing production declined 0.9% ultimately sparking fears of the Brexit woes weighing heavily on the UK economy. Sterling weakness remains a recurrent theme with the terrible combination of ongoing Brexit anxieties and uncertainty encouraging bears to install heavy rounds of selling at any given opportunity. Sterling/Dollar continues to be pressured on the daily timeframe with a breakdown and daily close below 1.260 triggering a steeper selloff towards 1.250.
The Euro/Dollar descended from its three-week high during Tuesday’s trading session with prices hovering above 1.070 as anxiety mounted ahead of Thursday’s heavily anticipated European Central Bank meeting. Recent events across Europe have placed the Euro on a chaotic roller coaster ride with the terrible combination of political instability in Italy and overall uncertainty keeping investors on edge. Market participants may use Thursday’s ECB meeting to attain further clarity over the health of the European economy and strategies needed to mitigate the risks from Italy’s referendum. It is being widely expected that the central bank extends its QE purchase by at least six months amid the uncertainty consequently leaving the Euro exposed to further pressure.
From a technical standpoint, the EURUSD is currently hovering above the pivotal 1.065 support and 1.085 resistances. Monday’s miraculous rebound seems unsustainable and such could expose the pair to downside risks. A breakdown below 1.065 could open a path back towards 1.050