'Near 100% chance of Fed hike in December, but what's next?' - Yohay Elam, Forex Crunch

YOHAY ELAM
PROFILE
• Current Job: Analyst at Forex Crunch
• Career: Founded Forex Crunch. Has been in the FX markets since 2005. Speaker and host at FXStreet Live Video channel.

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Yohay Elam has been into forex trading since 2005, and shares the experience and the knowledge that has accumulated. Like many forex traders, Elam has earned the significant share of knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always been of interest to him.

He founded Forex Crunch and is now one of the main speakers on our Live Video channel, hosting "Europe Live Market Open" every Wednesday from 7:00 to 8:00 GMT.

EUR/USD has gone on a steady downslope for the last week, nearing the 2015 1.0460 lows. Is this downtrend poised to continue? Where do you expect the pair at the end of the year?

After long periods of range trading, we are finally seeing the world's most popular currency pair move. EUR/USD could certainly continue lower, with monetary policy divergence seeming starker now: a higher chance of more rate hikes in the US with Trumponomics against more QE from the ECB. December is a critical month with announcements about the ECB's bond-buying scheme and the Fed's rate hike and new dot-plot. Headlines are already screaming "parity", but I think it will be hard to reach by the end of the year. It is always important to remember that the trade surplus keeps the euro bid. I expect 1.03 and perhaps parity in Q1 2017, but this depends on Trump's actual policies.

After Yellen's comments last Thursday on Fed rate hike coming soon, what do you think the odds are of this happening in December? Close to 100%?

A mix of mostly positive figure, calm in financial markets and the big buildup from the Fed means a near 100% chance of a rate hike in December. The buildup included Yellen's previous comments about a "stronger case for raising rates", followed by her last phrase about raising rates "relatively soon". Only a disastrous Non-Farm Payrolls report or a significant unexpected event can derail the rate train. The bigger question is what's next. The Fed might refrain from going bold on expectations for 2017. For 2016, the Fed forecast 4 hikes in the December 2015 dot-plot, and the year will end with only one hike. They may set out only two hikes, and adapt according to the developments, data-dependent as always.

Where is all this USD strength coming from? Is it a Trump rally? What is the market seeing after the US Elections for this big Dollar rally?

The USD strength comes from high expectations that Trump will fulfill his election promises with massive tax cuts and also spending on defense, infrastructure, and other things. The hope is based on the fact that Republicans will have full control of the government and the Trump's programs could go through. Big deficit spending can result in higher inflation and higher interest rates, boosting the dollar. In addition, the need to borrow heavily in bond markets implies a devaluation in bonds. The resulting higher yields also attract funds to the dollar. This virtuous cycle for the dollar may be a big overhype. Politicians do not always fulfill promises. In addition, the Republicans favor a smaller government. They may support tax cuts but not necessarily side with big spending. We will know when Trump enters office on January 20th.

GBP is also strengthening against the EUR. What are the key levels for the EURGBP?

The pound enjoys its pre-US election Super Thursday. The BOE's stance is neutral, in contrast with the ECB's easing stance. EUR/GBP levels to the downside are 0.85, 0.8420, 0.8335 and 0.8260. On the topside, 0.8650, 0.8720, 0.8780 and 0.8880 are eyed.

Do you expect the OPEC agreement on Oil production cuts to be confirmed for good in the next OPEC meeting? Are you bullish on the oil market?

We may get some kind of an agreement at the end of November. This time, Saudi Arabia is keen to obtain a deal to curb oil production and stabilize prices. This is different from their previous stance, such as the total discord seen in Doha, back in April. However, their rush to see a deal could result in many exemptions for Iran, Iraq, Libya and perhaps other countries. Even if Russia also joins OPEC, the nature of the deal could be insufficient: an output cap which is insignificant and a timeframe that is too open. And even if the deal seems powerful, the question of implementation remains open. Actual oil output could exceed the quotas agreed in Vienna quite soon. All in all, I see oil prices stabilizing and not crashing, but is hard to be bullish. If prices do rise, the US shale industry is likely to ramp-up production, eventually depressing prices.