Dollar buoyed by hawkish Fed minutes

October 14, 2016

Dollar bullish investors were on the offensive on Wednesday as September’s hawkish FOMC meeting minutes reinforced expectations over a US interest rate rise before year-end. Market participants were provided some clarity after the minutes showed September’s inaction being a “close call” with several members even agreeing that the Fed should raise rates in the near term if US data continued to strengthen. Bullish investors warmly welcomed the hawkish bias with the Dollar Index lurching towards 98.00 as optimism rose towards the central bank breaking its tradition of caution this year. With US domestic data repeatedly displaying signs of stability and inflation slowing treading towards the golden 2% target, there seems to be a justifiable and compelling reason for the Fed to pull the trigger in the coming months.

A key talking point from September’s Fed minutes was the growing divergence within the committee, as several officials warned about the potential costs of keeping rates unchanged for prolonged periods. Although the overall market reaction was somewhat muted, the minutes have displayed the Federal Reserve’s intentions to raise US rates this year, consequently providing the markets a cushion for the shock beforehand.

Sterling on a chaotic ride

Sterling was flung onto a chaotic rollercoaster ride this week with prices violently swinging between losses and gains as the explosive combination of hard Brexit jitters, political uncertainty, and a resurgent Dollar left investors on edge. Surprisingly the Brexit-gripped pound was the best performing currency on Wednesday following UK’s Prime Minister Theresa May’s agreement to hold a Parliamentary debate on the strategy for the Brexit negotiations. It is becoming increasingly clear that the Brexit anxieties have left the Sterling extremely sensitive and this was displayed on Wednesday when the GBPUSD spiked up over 200 pips. Regardless of these short-term gains, the Pound remains heavily depressed with steeper losses expected as the Brexit jitters haunt investor attraction towards the currency.

Sterling/Dollar remains fundamentally bearish with prices potentially trading closer to the parity dream as the toxic mixture of hard Brexit fears and renewed Fed hike hopes entices sellers to attack incessantly. From a technical standpoint, the breakdown below 1.2200 could trigger a further selloff towards 1.2000.

WTI under pressure again

WTI Oil stumbled towards $49.50 on Wednesday after the Organization of the Petroleum Exporting Countries (OPEC) reported its oil production hitting an eight-year high in September consequently rekindling concerns over the excessive oversupply. The downwards move was complimented with uncertainty over Russia’s willingness to trim production following comments from Rosneft boss Igor Sechin over how his company will not cap oil production as part of the potential OPEC freeze deal. OPEC and Russia have talked a big game on the potential freeze deal and could pay heavy prices if investors are left disappointed once again.

Although the recent surges in oil have been impressive, sentiment towards the commodity remains bearish with further declines expected as the oversupply fears haunt investor attraction. Attention may be directed towards Thursday’s crude oil inventories report which could send oil lower if there is a build-up in inventories.

Commodity spotlight – Gold

Gold has hovered above four-month lows at $1257 this week as expectations mount over the Federal Reserve raising US interest rates before year-end. This zero yielding metal could be vulnerable to further losses as the combination of Dollar strength and rising Fed speculations create a foundation for bears to install repeated rounds of selling. Wednesday’s hawkish Fed minutes may have cushioned the markets for a pending rate hike and such could translate to downside risks for Gold. From a technical standpoint, a decisive break down below $1255 could trigger a selloff towards $1240.

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