Dollar strength dominates currency markets

Global Markets

The aggressive 5% sell-off in the Shanghai Composite Index on Friday presented risks to the market and weighed on both European and US futures as last week drew to a conclusion. The heavy losses throughout the past trading week in China were linked to a wave of regulatory crackdowns and declining industrial profits, but an uplift in sentiment could be provided if it is confirmed on Monday that the Yuan has been included in the IMF’s exclusive Special Drawing Rights (SDR) basket of currencies. While the inclusion of the Yuan into the SDR basket has a low immediate impact on the economy of China itself, the highly symbolic gesture from the IMF to introduce the Yuan into the SDR illustrates how powerful China has become to the global economy.

The ever-rising optimism over the possibility of a US interest rate rise in December, alongside the ongoing threats that monetary policy elsewhere could be loosened further has enabled the USD index to finally conquer heavy psychological resistance at 100. Sentiment towards the Dollar is very bullish and with data throughout November reinforcing optimism around a US interest rate hike before the end of 2015, as well as other central banks still threatening further easing, this may provide the opportunity for the USD index to appreciate further. The previously stubborn resistance at 100 may now transition into dynamic support, which could be attractive to buyers who see the potential to send prices back towards the March 2003 highs at 102.

The upcoming week is going to be a volatile one for the financial markets with high-risk announcements scheduled throughout the week. Market participants are clearly going to be waiting for the European Central Bank (ECB) decision on Thursday, but it must not be forgotten that the OPEC decision and US Non-Farm Payroll for November is also scheduled this week. Although the Fed funds futures market is now pricing in close to an 80% probability of a US interest rate hike in December, an unexpectedly weak NFP this Friday could throw a complete wrench into these plans and expose the USD to sudden weakness.

Currency Markets

The EURUSD is being continually pressured by the growing divergence in both monetary policy and economic sentiment between the United States and Europe with the pair having now sunk to a near eight-month low at 1.0565. Sellers have been encouraged to attack the Eurodollar with force and if the ECB do ease monetary policy further in a couple of days, we are still at risk to facing parity before the end of the year. The increased expectations over the ECB easing monetary policy further in December has prevented any possibility of a recovery in the Eurodollar even after a heavy month of selling. This pair is heavily depressed, both technically and fundamentally and with little signs of a bounce back it can still decline to the 12-year low at 1.0461.

Technically the EURUSD is heavily bearish on the daily timeframe as there have been consistent lower lows and lowers highs. Prices are trading below the daily 20 and 200 SMA with the MACD crossed to the downside. The previous resistance around 1.064 may invite an opportunity for sellers to send prices towards the 12-year low at 1.0461.

Sterling bulls surrendered all momentum last week as the GBPUSD sank to near 3-week lows at 1.5029, while also edging closer to the psychological support at 1.50. The sentiment towards the Sterling is very weak after BoE Governor Mark Carney dealt another blow to buyers by failing to provide a concise timeframe on the possibility a UK interest rate rise. Not only is there hesitance from the BoE to raise interest rates, but there is now hesitance from major policy makers at the BoE to provide any type of potential timeframe.

The Sterling continues to face punishment from the Bank of England’s visible reluctance to raise UK interest rates, while the ongoing low inflation growth throughout the UK is also haunting any optimism over an increase in interest rates. Investor sentiment towards the Sterling was also pressured even further when GDP growth in Q3 pointed towards a slowdown in economic momentum and this may encourage sellers to send the GBPUSD towards 1.50 and possibly even lower.

Gold has become a victim to ongoing Dollar appreciation and plunged almost 2% on Friday to a near six-year low at $1052, concluding its 6th straight week of declines. The precious metal is continuously facing pressure from the resumption in optimism over an increase in US interest rates this year, and the string of robust performances from the United States economy in November has installed heavy selling momentum throughout metal trading. With Gold being fundamentally bearish and consistently attacked by sellers, this metal is going to remain completely dictated by US interest rate expectations and further USD strength holds the potential to invite sellers an opportunity to price in declines towards $1050.

USDCHF

The USDCHF is technically bullish on the daily timeframe. Prices are trading above the daily 20 SMA and the MACD has crossed to the upside. Prices may continue to incline to the highs of January 2015 based around 1.0398.

USDJPY

The USDJPY is technically bullish on the daily timeframe. Prices have found some support just above the daily 20 SMA and the MACD still points to the upside. A breakout above 123.00 may invite an opportunity for buyers to send the pair towards 123.70.

AUDUSD

This pair is in the process of turning bearish on the daily timeframe. A breakdown below the daily 20 SMA may open a path for prices to decline towards the 0.7050 regions.