Since I last wrote at the end of April, the US Dollar index has sold off more than 2.5 per cent.
Sentiment in the United States has severely eroded following the political fallout in Washington. The controversy surrounding the dismissal of the director of the Federal Bureau of Investigation (FBI) James Comey has hit risk moods hard and have cast a long shadow on Mr Trump’s proposed tax cuts. It is yet another hindrance in his presidency, which casts doubt on his ability to push forward his future budget plans.
The dollar sank to six-month lows against a basket of major currencies while US treasury yields and US stock markets all closed the past fortnight lower. Political risk is equating into economic risk and ongoing developments from the Washington investigation will be a main theme driving sentiment in the upcoming month and will keep any dollar gains in check.
Supporting the dollar will be the other large elephant in the room at the upcoming Federal Reserve’s FOMC meeting on June 13 and 14. Markets are currently pricing in a 78.5 per cent chance of a Fed hike towards 100-125 basis points when the announcement is made in the late evening on June 14, but it will be on the future outlook of the Fed that markets will focus on.
How the political fallout will affect Mr Trump’s lobbying power to push his budgets will be keenly watched by the Fed and may see it adopt a less aggressive stance towards rate hikes in 2017. Inflation has also been waning in the US, which could strengthen the case of a more dovish Fed through the summer.
Technically, the dollar index is trading near the base of the weekly Ichimoku cloud (a trend indicating chart) and we expect initial support to come in at 97 levels followed by 95.3 levels in the lead up to the FOMC meeting. During this period, relief rallies would see upsides in the dollar index capped at 97.9 initially followed by 99.2.
Across the pond, it has been all about the euro. The recent Commodity Futures Trading Commission report of commitment of traders has shown that euro long positions have spiked to their highest levels in three years.
The euro has been on a tear in the past fortnight on the back of improving political and economic data. Continuing to build on momentum from the favourable French elections, the euro entered another bullish channel following the German chancellor Angela Merkel’s unlikely victory in a recent state election. Her win – in her rival’s state seen traditionally as a centre-left hotbed – was welcomed by markets and triggered rallies in the euro.
Dubai Gold & Commodities Exchange (DGCX) euro contract moved above 1.11 levels against the dollar for the first time in six months.
Improving political sentiment along with stronger EU data should see the euro further supported in the weeks ahead. Markets have been taking many positives and are positioning themselves for a more hawkish European Central Bank the next time it convenes on June 8.
We can expect the euro to test levels as high as 1.132 in the lead up to the meeting with downsides capped at 1.106 followed by 1.093 levels.
And finally, crude prices opened at an upward gap this week as reports on Friday hinted at the possibility of deeper Opec cuts this week. Opec is set to convene on Thursday.
The group has already confirmed that the current output levels will be extended for a further nine months at least until March 2018, but the fact that members may even consider a deeper cut has seen crude prices soar.
It would prove prudent to trigger positions only after the meeting result on Thursday, which could see oil prices test US$55 a barrel in the immediate aftermath of a cut.
If however Opec "disappoints" oil markets and maintains current output levels, this could see Crude re-test 49 levels followed by 47.60 levels.
Gaurav Kashyap is a market strategist at EGM Futures