Dollar bruised by Fed caution

27 July, 2017

The Dollar tumbled to fresh 13-month lows against a basket of currencies during early trading on Thursday, after July’s Federal Reserve policy statement was presented with a dovish touch. Although the central bank signaled that it would begin shrinking its massive holding of bonds “relatively soon”, the concerns over inflation remaining “somewhat below 2%” in the near term simply stole the spotlight. With weakness in inflation presenting a risk to the Federal Reserve’s hiking cycle and weighing on the prospects for further interest rate hikes, the Greenback remains vulnerable to steeper losses.

As the Dollar wallows at 13-month lows, investors may direct their attention towards a duo of economic reports later today which could offer further insight into the health of the U.S economy. The U.S Core Durable Goods Order figures will be in focus, with markets expecting a 0.4% m/m print for June, while unemployment claims are expected to hit 241k for the week ended July 22. With the Greenback struggling to nurse its deep wounds, further downside may be on the cards if Core Durable Goods and unemployment claims fail to meet expectations.

From a technical standpoint, the Dollar Index remains heavily bearish on the daily charts as there have been consistently lower lows and lower highs. Bearish investors who were itching for an opportunity to attack prices further, received encouragement in the form of lagging inflation concerns and this was represented in price action on Wednesday. With the currency becoming increasingly sensitive to monetary policy speculations and markets now pricing in a 46.8% probability of a 25 basis point rate hike in December, price weakness is likely to remain a recurrent theme.

Commodity Spotlight – Gold

Gold sprinted to a fresh 6-week high above $1260 during late trading on Wednesday, after the Federal Reserve’s cautious inflation assessment in July’s policy statement weighed on prospects for higher US interest rates. The upside was complimented by a sharply depreciating US Dollar which created a solid foundation for bulls to install fresh rounds of buying. With the zero-yielding metal notoriously known for being dictated by US rate hike expectations, there is a strong possibility of prices marching higher if speculations of the Federal Reserve taking action this year decline even further.

Gold bulls may find further support in the form of Brexit related uncertainty and political risk in Washington that continue to drive the flight to safety in the background. From a technical standpoint, a decisive breakout and daily close above $1260 should encourage a further appreciation higher towards $1268.

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