FOMC clarity ensures USD demand remains intact

After the Federal Reserve calmed down investor sentiment by reassuring traders it still has every intention to begin raising interest US interest rates next year, it was no real surprise the USD concluded the week by strengthening against its counterparts. Gains were also recorded in US stocks, where the S&P 500 finished near its all-time record highs. There seems to be some confusion regarding how the S&P 500 managed to finish the week by rallying its highest in three days since 2011, despite the Fed reiterating it will raise rates and the most likely explanation for this is because it also confirmed rate rises will be “gradual”. By announcing this, we can expect the Federal Reserve to perhaps hike rates by 25 basis points every two or three meetings and not the one-off 100 point increase that would have likely encouraged stock market volatility.

The EURUSD concluded the week in line with expectations, when the pair tried to take advantage of a quieter day of US economic data but failed to advance any higher than 1.2301. From here, the pair came crashing down and recorded a new two-year low, at 1.2219. Following the Federal Reserve providing assurances that it intends to raise US interest rates next year, we can expect USD demand to remain consistent and likely avoid further USD sell-offs before the end of the year. Meanwhile, the comments from European Central Bank (ECB) Executive Board member Benoit Coeure that the ECB can do more to combat low inflation just emphasized the wide divergence in sentiment between the two central banks, and reconfirmed to traders the longer-term bearish outlook for the pair.

The EURUSD bulls now have some serious red flags ahead, and with the current EU economic sentiment being weak and unlikely to change anytime soon, prospective upside moves would likely only be encouraged through USD profit-taking. The major issue for the bulls though is that the Federal Reserve was defiant last week in clarifying its intentions to raise US interest rates during the upcoming year, therefore it would require something unexpected to happen for investors to become encouraged to take profit on the USD.

The USDCHF also managed to conclude trading on Friday near two-year highs at 0.9847, following the Swiss National Banks (SNB) decision on Thursday to introduce negative interest rates weakening the CHF. The SNB introduced negative interest rates in defence of its commitment to the 1.20 EURCHF floor but looking at the EURCHF already falling as low as 1.2024 on Friday, further easing from the SNB is likely next year. The longer-term EURUSD risks being on the downside also means the longer-term prospects for the USDCHF are bullish. Traders should continue to pay particular attention towards any mention of further stimulus arriving from ECB policymakers because this would likely threaten further action from the SNB, and result in USDCHF continuing its climb towards parity.

The GBPUSD also performed in-line with expectations on Friday, with the pair erasing gains from Thursday’s impressive retail sales performance and concluding the week at 1.5623. The upcoming week is very quiet in terms of UK economic data and unless Tuesday’s finalized third-quarter GDP encourages some unexpected volatility, not much action is expected this week. Thursday’s impressive retail sales provided further evidence of the UK’s strong fundamentals but the Bank of England’s (BoE) extremely dovish outlook on inflation is pushing back interest rate expectations and thwarting investor attraction towards the GBP. This is really limiting the sterling bull’s chances of advancing to the upside, while potential USD strength could pressure the GBPUSD into dropping below 1.56 once more before the end of the year.

After the bears dug themselves through various psychological support levels over recent weeks, there finally appears to be some signs a floor might have been located in the oil markets. After threatening a move towards the $58.49 support level, Brent bounced for the fourth successive day and reached $62.63 on Friday. Crude has noticed a similar pattern, where any moves towards support around $54.30 have resulted in the commodity reversing. Crude concluded trading on Friday around $57.30. While the oil markets locating a floor would breathe a sigh of relief by those impacted by lower oil prices, this could also be a consolidation period before the next potential leg lower. There was a pause of selling in the oil markets on one occasion during October and November, so a consolidation period can’t be ruled out of the equation either.