'There's a US Dollar tug of war between Trump and Fed hawks' - Lukman Otunuga, FXTM

LUKMAN OTUNUGA 
PROFILE
• Current Job: Research Analyst at ForexTime (FXTM)
• Career: Spent two years as a research analyst with international currency broker FXCM prior to joining FXTM. Holds a BSc degree in Economics from the University of Essex and an MSc in Finance from the London School of Business and Finance.

View profile at FXStreet

 

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency markets.

Yellen’s testimony at the Senate sounded more hawkish than usual. Does this mean the Fed will deliver the three rate hikes hinted in December?

Yellen’s hawkish rhetoric at the Senate coupled with her optimism over the health of the US economy has effectively heightened expectations of higher US interest rates this year. With inflation in the U.S rising steadily, labour markets displaying resilience and overall domestic economic data following a positive trajectory, it may be safe to suggest that the prerequisites for an imminent rate increase have been fulfilled. While such comments from the Fed also stating that waiting too long to remove accommodation would be unwise continues to fuel the speculations of the central bank taking action, it is the visible lack of commitment to a timeline in raising rates that have kept investors on edge. Although the improving market conditions could warrant three rate hikes in 2017, the major unknown known as Trump may sabotage the central bank's efforts. Investors must also keep in mind that the Fed has a history of over promising but under delivering with last year’s unfulfilled four US interest rate hikes acting as a prime example.

If Trump delivers on his promised expansionary fiscal plan, is there a way he can avoid a USD surge across the board?

The Dollar remains entangled in a fierce tug of war between the Fed hawks and Donald Trump. Although it is becoming visibly clear that Trump may want a weaker Dollar to help U.S exporters become more competitive on the global markets, the inflated expectations of a promised expansionary fiscal plan which will be supportive of US growth may elevate the Greenback. While the ongoing uncertainty, repeated Dollar bearish comments from Trump and fears of protectionism impacting US growth may limit gains on the Greenback in the short term, prices may be set to surge higher on the prospects of higher US interest rates. It must be kept in mind that the actions of the Federal Reserve remain independent of the government and an expansionary fiscal plan that may boost US growth should prompt further US rate hikes ultimately strengthening the Dollar across the board. In this period of political risk and rising uncertainty, there still is a threat that markets will overlook the fundamentals and such may play a key part in who wins the Dollar tug of war.

UK data this week has shown some worrisome trends, with PPI skyrocketing and wages stagnating, but the Pound has not fallen too much. Should we expect more GBP bearish runs in the coming weeks?

The rising political uncertainty around Brexit has ensured Sterling weakness remains a key market theme for the first quarter of 2017. While economic data from the UK has repeatedly displayed signs of resilience post-vote to leaving the European Union, it is the persistent uncertainty which has effectively haunted investor attraction towards the Pound. The growing threat of economic fundamentals discarded amid the Brexit woes could punish Sterling further with market participants solely directing their attention to how the UK economy fares after the article 50 is invoked in early March. Sterling remains fundamentally bearish with the rising jitters, battle of words between financial heavyweights on the Brexit topic and the ongoing uncertainty limiting upside gains. The Sterling/Dollar is an excellent representative of how bears have exploited the anxiety to install repeated rounds of selling at any given opportunity. Technical traders may observe how the GBPUSD reacts to the 1.2400 support with weakness below potentially opening a path lower towards 1.2200 and 1.2000 respectively.

Which GBP pair do you think is the best to trade right now?

The bearish combination of Sterling weakness from the Brexit woes and Yen’s resurgence amid the risk aversion has made the GBPJPY an attractive pair to trade. This pair may come under renewed selling pressure on the daily charts with a breakdown below the tough 139.00 supportive regions encouraging a further selloff lower towards 136.00 in the medium term. Technical lagging indicators on the daily charts such as the 20 moving averages and MACD all marry this bearish scenario. If risk aversion intensifies from the political risks across the globe, Brexit woes and Trump developments in the United States, then the Yen may truly become a trader’s best friend which should translate to further downside on the GBPJPY.

USDCAD looks like a very uncertain but interesting currency pair to track this year. What’s your outlook on the Loonie?

The Loonie has been placed on a wild rollercoaster ride this year with prices aggressively swinging between losses and gains. While fundamentally the stabilising oil prices, improving confidence towards the Canadian economy and prospects of higher US rates should keep the USDCAD stable, technically prices have tilted to the downside on the daily charts. It seems Dollar weakness in the short term has encouraged sellers to the drag the USDCAD lower towards the stubborn 1.3000 support level. If bears manage to conquer the 1.3000 support then the downside momentum could trigger a further selloff lower towards 1.2900. On the other hand, if this same 1.3000 proves supportive and the Dollar regains its attitude then the USDCAD could be poised to break above 1.3200 and 1.3400 respectively.