US Dollar Forecast to Strengthen into Year-End, GBP/USD to Top at 1.28 say Commerzbank
The US Dollar is forecast to extend its good form into the end of the year when the US Federal Reserve has its seminal interest rate meeting on December 14 where it is expected to raise rates say analysts at Commerzbank.
The US Dollar was the star peformer for the week ending November 11th 2016.
That the Dollar was bid higher after Donald Trump beat the 'continuity candidate' Hillary Clinton in the US residential race came as a surprise to many analyts.
However, the Dollar was not the only outperformer.
“The only currency in our sample that beat the mighty USD this week was sterling, thanks a combination of continued short covering and some speculation about the UK's improved Brexit negotiating position with a potential US downgrading of its NATO commitments,” says Alvin Tan, analyst with Societe Generale in London.
The consensus in the run-up to the vote had been that a Trump presidency would result in a downgrading of expectations that the Federal Reserve would raise interest rates in December.
In actual fact the probabilities rose from 72% on the Tuesday of the election to 76% on the day after when Trump won.
With everyone still expecting a rise in interest rates in December therefore, the Dollar rebounded strongly.
Further fuel was then added by the expectations of a massive stimulus plan, which would push up spending and inflation, leading to even more interest rate rises and a new paradigm of a steeper Fed interest rate trajectory, replacing the previous dominant theme of rates remaining ‘lower for longer’.
“Interest rate expectations have even exceeded pre-election levels – particularly with regard to 2017. Thursday's inflation figures for October are unlikely to stand in the way of a rate hike, especially given that long-term inflation expectations came in higher as well. Hence, there is a lot to argue that the USD-positive market sentiment will remain with us for now,” argues Commerzbank’s Esther Reichelt in a recent brief to clients.
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Reichelt adds that the longer-term risks of Trump’s policy agenda do not appear to be of concern to markets currently.
“But a more aggressive Fed appears to be on the cards – while both the European and Japanese central banks keep retaining their dovish bias,” says the analyst.
This leads to Commerzbank’s forecasts of a downside bias for GBP/USD, which is likely to range trade between 1.2320 and 1.28.
For EUR/USD, she also sees forces to the downside prevailing and the pair moving in a range between 1.0740-1.1000.
However, EUR/GBP is also seen moving lower, and stuck in a range between 0.8520-0.8800.
German Economic Growth Slows in Q3
Underpinning the softer Euro outlook are expectations that growth in Q3 in Germany is likely to be disappointing.
“While the outlook for Q4 has improved of late, the economic balance for Q3 should turn out rather weak.
“We expect that the German economy grew by only 0.2% on the preceding quarter, which would mean that the growth rate was the slowest since last year.
“The Federal Statistical Office will only release the details in the week after next,” said Commerzbank’s Ralph Solvene.
Another major drag on the single currency is likely to come from increasing political risk, as markets start to price in the possibility of further political instability in the Eurozone.
A referendum in Italy may cause an upset and see the Five Star anti-EU party gain a foothold, however, the main threat at the moment comes from the Netherlands in March where Geert Wilders vehemently anti-Eu party is leading polls on a ticket to take
the country out of the EU with immediate effect.
As such whilst the outlook for the Dollar is positive, that of the Euro is probably tipping to the downside.
