USD forecast 2015

Yellen getting ready to move

While recent US economic data has reinforced expectations of a hike in the Fed funds rate from Federal Reserve chairman Janet Yellen is likely to come sooner rather than later, what risks lie ahead as the Fed and the ECB look set to try and move in opposite directions.

2015: the year of the King Dollar

While a weaker trade-weighted dollar helped to support US growth in the earlier parts of 2014, the consensus forecast is for the differential between US and European growth forecasts to push the dollar higher in 2015.

Anticipating the Fed hike

The final reading of US third quarter GDP, printed just in time for Christmas, increased expectations of a Fed rate hike in April-June 2015. The final reading of third quarter GDP increased by a huge 5 percent, the strongest growth since the third quarter of 2003 when GDP printed up 6.9 percent. The gains came primarily from a big surge in personal consumption, up by 3.2 percent in the quarter. Consumption formed 2.21 percent of the 5 percent GDP increase and was the highest increase since the fourth quarter of 2010.

In addition to the surge in headline GDP growth, the US has also seen robust recovery in the labour markets, with sustained 200k+ non-farm payroll job creation putting the question of labour market slack and what levels constitute full employment into focus. But as the slack is taken out of labour markets and we see some pushing up on price levels, real wage gains may be put under pressure, denting the personal consumption gains that have helped to launch GDP growth to 11-year highs.

As Deputy Chairman of the Federal Reserve, the now Fed Chairman, Janet Yellen was instrumental in pushing the policy of forward guidance. But with US unemployment levels now approaching full employment (estimated by the Congressional Budget Office to be around 5.7 percent), we may see a shift in Fed forward guidance as the gap threatens to turn negative. But assuming that the Fed wants to lift rates sufficiently to leave space for a return to conventional monetary policy tools, it will need to lift the current Fed funds rate sufficiently to give it that room to operate. As we push further into the year and closer to an initial rate hike, we will be looking for language from the Fed managing expectations of the rate of any hikes and to give indication of future monetary policy ambitions as it steers towards its long-term 3.75 percent rate projection.

External concerns

Unlike the majority of the G7, the US is relatively lower dependence on its net exports meaning it is less exposed to the problems in the Eurozone and in Japan, though the prospect of the Fed moving into a hiking cycle while Europe contemplates QE plays into the prospect of continuing dollar strength into 2015, weighing on exports while boosting imports.



Thatbeing said, exports are not an irrelevant contribution and ought to be closely monitored going into 2015 –however the currently decline in fuel prices should help US exports to remain competitive despite a strengthening dollar. Exports helped in a large way to keep the US economy ticking along in 2014, especially in the first half of the year when a weaker trade-weighted dollar helped boost external demand for US goods and in turn helped to fuel the improvements in the labour markets which have allowed consumption to take the reins of the US recovery.

European cointegration

As we highlighted in our European outlook report, we may see the issue arise of cointegration between US and European yields (especially the Bund rate) and the question of whether there is a long-run equilibrium relationship between the two economies’ business cycles.

As such, we may see a diverging of bond yields as the ECB launching aggressive loose money policies while the US moves into a tightening phase. However, covered interest rate parity may come into play, exerting pressure from interest rate differentials on real interest rates, limiting the ability of the Fed and the ECB to move in opposite monetary policy directions.

Fed forecasts

Recent strong GDP prints may push the Fed to further upward revise its GDP expectations, however there are a number of factors which may limit this upside, including declining capex expenditure.

The Fed’s unemployment forecasts see it dipping below the CBO’s full employment threshold.

Technical analysis

EUR/USD Forecast

The EUR/USD pair opened the year at USD1.3761, reached its highest in May at USD1.3994, and is positioned to close it near the lows, set so far at USD1.2246. It has been a tough year for the common currency, due to the economic turmoil in Europe, still on the go.

And the technical picture does not look any better: the monthly chart shows that the price has fallen steadily for the last six month to reach its 200 SMA first time since July 2012. The same chart shows that price bounced sharply from it, also the previous time it reached, back in June 2010 which makes of the MA a quite significant support into 2015. It can also become a significant resistance and anticipate another year of losses for the EUR, but to define where chances are, would be a good idea to see what the rest of the chart is saying. Technical indicators maintain a clear bearish slope below their midlines, with Momentum at 92 and RSI at 34, both far from extreme readings. 20 SMA is slowly gaining bearish tone, suggesting latest slide has gone maybe too fast and too far.

The same chart also shows that the price is developing inside a triangle which base is located not far from current levels, around the USD1.1900 level. Overall, the technical picture is clearly bearish, suggesting USD1.2240 immediate support can give up. But it will be a break below that USD1.1900 level which will confirm the long term bearish breakout in the EUR/USD with immediate bearish target then at 1.1639 November 2005 monthly low.

To the upside, the most significant long term resistance now stands at the USD1.2600 level that contained advances over the last two months of the year, followed by USD1.2884, October 2014 high. It will be only a recovery above this last, quite unlikely at least for the first quarter of 2015, which will revert the negative course.

GBP/USD Forecast

GBP succumbed to a strong dollar after the pair posted a multiyear high of USD1.7190 from where it entered a losing spiral that so far reached USD1.5539. The fundamental imbalance between Central Banks’ policies is which continues to favor the greenback against its majors rivals, and that particular picture is not set to change in the first half of the upcoming year.

Technically, the monthly chart shows that the price develops below its 20 SMA, and while indicators broke below their midlines last November. The limited range of December however, has left indicators directionless but below their midlines. The pair has closed in the red for six month in a row, and December doji alongside with indicators losing their downward potential, suggest the pair may correct higher in the first quarter of 2015. If the movement is a correction or a change in the dominant bearish trend is something yet to be confirmed.

A break below the year low should signal further declines ahead, eyeing a long term ascendant trend line coming from USD1.3501 January 2009 low, comes as the probable bearish target then around USD1.5200, whilst below this last there will be little room to maneuver to the upside. The breakout point to the upside stands at USD 1.6000 well above the current level, and further above, the 38.2 percent retracement of the latest monthly decline stands at USD1.6165, almost 1000 pips above current level. It will take a recovery above this last to confirm a GBP comeback in the long term, back towards the USD1.7000 figure.

USD/JPY Forecast

2014 began quietly for the USD/JPY pair after it added nearly 2500 pips in 2013. For the first half of the year, the pair was confined to a tight 400 pips range, until it finally exploded to advance over 2000 pips in the six months from July. It was a mixture of dollar strength and continued stimulus from the BOJ that pushed the pair to a 7-year high at JPY121.84.

On a monthly basis the technical picture shows 6 months of steady gains to December that points out to close with a doji. RSI stands at historical highs of JPY82 and is beginning to look exhausted, while momentum reached a lower high around currently JPY121 level and lost upward steam. The price in the meantime, stands more than 1200 pips away from its 200 SMA.

All of this suggests a top may have come into place, but by no means is a sign of a reversal. The most market players can expect if the top is confirmed, is a consolidative stage that can extend into the first months of 2015. But it the price manages to breach the JPY122.00 level, the rally can extend with not much in the middle up to JPY124.13, June 2007 high while if this last is finally taken, speculators will likely put their eyes on the JPY130.00 figure.

To the downside, the risk of a stronger correction will come with a break below this December low at JPY115.55 that may lead to a downward extension towards JPY112.30, where the pair still has an unfilled gap following late October surprise stimulus announced by the BOJ. If somehow the price reaches that level, which has limited possibilities from a fundamental point of view, the next movement will be determinative for the long term trend, as a bounce from there should revive demand and see price advancing again towards JPY120.00, while a break below will signal a steady decline that can extend down to JPY105.00 over the following months.