'Yellen unlikely to be too hawkish, might vaguely leave doors open to act in 2017' - 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.
Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on technical and fundamental analysis of the global currency, commodity and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals and has published a series of educational articles on forex trading with City A.M.

Fed rate hike in December seems a given right now but there seems to be a lot of interest on the 2017 outlook. What kind of message shall we expect from the Fed in December?

The unanticipated events of November have seen expectations of the Federal Reserve raising rates rise to frightening levels with the Fed funds currently pricing in a surreal 100% probability of a US rate hike in December. Donald Trump’s shocking presidential victory coupled with Dollar’s market shaking resurgence could be factors which ensure December’s Fed meeting has a unique touch. With speculations already rising over Trump’s administration implementing fiscal stimulus measures, boosting infrastructure spending and cutting taxes, there is much optimism over an improvement in US economic growth which could spur inflation. A strong rise in inflation may be the catalyst needed for the Federal Reserve to repeatedly raise US interest rates in 2017 and this could be what investors would like to hear at December’s meeting. While such a hawkish message may gift participants the clarity long sought, realistically there seems to be a stronger likelihood that Yellen vaguely leaves the doors open for the central bank to act in 2017 if the Trump effect promotes growth and spurs inflation.​​​​

Is EURUSD finally headed to parity?

The elevated concerns over slowing Eurozone growth and ongoing political instability in Europe have left the Euro exposed to downside risks. Sentiment remains firmly bearish towards the currency with steeper declines expected as bets intensify over the European Central Bank extending its QE program at December’s policy meeting. The explosive combination of Euro vulnerability and Dollar strength amid the mounting rate hike expectations could make the parity dream a reality on the EURUSD in the medium to longer term. From a technical perspective, prices are bearish on the daily timeframe as there have been consistently lower lows and lower highs. Previous resistance around the 1.065 region could transform into a dynamic support which encourages a sharp decline lower towards 1.050. In the medium to longer term, if bears maintain dominance below 1.050 then 1.00 (parity) could be the next major goal.

Why have USD and stock markets rallied so much after Trump's win?

The Trump effect has created a rare scenario where both the Dollar and Stocks have enjoyed extended periods of gains. Global stocks were boosted by optimism over an improvement in growth in the world’s largest economy under Trump’s presidency while the renewed US rate hike expectations have ensured the Greenback remains buoyed. Oil sharp appreciation amid the rising hopes of an OPEC deal attributed to the stock market rally consequently complimenting the situation where both the Dollar and Stocks have traded to awe inspiring levels. While this anomaly may be seen as impressive in the short term, investors should remain diligent when normality kicks back in 2017. It should be kept in mind that concerns still linger over the health of the global economy while participants have yet to fully digest the Trump reality. There still remains some uncertainty over Trump’s promises of fiscal stimulus and a situation where reality greatly differs from expectations may cool the Dollar rally in the New Year.​​

Which major currency pair do you expect to make a bigger move from now until the end of the year?

The Sterling/Dollar has been a heavy loser this year with the ongoing Brexit episode haunting investor attraction towards the pair. Persistent hard Brexit fears continue to erode buying sentiment while uncertainty attracts bears to install heavy rounds of selling. With the GBPUSD trading in a tightening range as the year slowly comes to an end, there could be a possibility of bears waiting for the Federal Reserve to raising US rates in December before staging a market-shaking selloff. From a technical standpoint, the pair fulfils the prerequisites of a bearish trend as there have been consistently lower lows and lower highs. A breakdown and daily close below 1.240 could be the first steps bear to take to send prices towards 1.220 and potentially lower.

What is your oil price outlook? Do you think OPEC will finally seal a production cut deal?

Oil prices remain extremely volatile and unpredictable as expectations fluctuate over OPEC securing a freeze deal at next week’s formal meeting in Vienna. The repeated comments from Iraq, Iran and Saudi Arabia displaying their readiness towards fighting the oversupply woes have kept oil somewhat buoyed while Russia’s willingness to join an OPEC production led production freeze continues to inflate hopes of a meaningful freeze deal. Despite all the ongoing talks of cooperation from major oil producers, fears still linger over the effectiveness of any OPEC deal with the prolonged oversupply woes negatively impacting buying sentiment towards the commodity. There have even been discussions of OPEC deliberately exploiting oil’s sensitivity to generate false speculative boosts in prices and this may come at a heavy cost if investors are left disappointed once again. Although OPEC remains notorious for surprises, a potential “Doha failure” at Vienna’s meeting has the ability to send prices tumbling back towards $40. From a technical standpoint, a breakdown below $47 on WTI Crude could encourage a steeper selloff towards $45 and lower.