Dollar smiles while sterling scowls

September 29, 2017 09:14 AM

Sterling’s price action this week can be described as messy, as rocky Brexit negotiations between the United Kingdom and Brussels, left investors on edge.

Sentiment towards the pound was already fragile amid the uncertainty, and reports released on Friday, showing a downward revision of Britain’s annual growth rate, put more pressure on the currency. Economic growth in the UK rose by just 1.5% annually in the second quarter of 2017, which was down from an earlier estimate of 1.7%. This was the slowest annual growth since 2013 and continues to suggest that Britain is struggling to shake off the Brexit blues. With Brexit uncertainty and soft economic data weighing on sentiment, it will be interesting to see how the Bank of England (BoE) responds during November’s policy meeting.

BoE Governor Mark Carney was in the spotlight yesterday, as he delivered the opening remarks at the BoE’s conference, celebrating 20 years of independence. Investors who were betting on Carney to reinforce the BoE’s hawkish stance were left empty-handed, after the central banker sounded somewhat cautious. What mildly excited sellers, were statements that the BoE could not be expected to nullify the likely hit to the UK economy, as a result of Brexit. With Carney informing markets that the central bank will do everything it can to support the fragile UK economy as it tackles Brexit, market players may be forced to re-evaluate the likelihood of higher UK interest rates. It should be kept in mind that Brexit has dished out bucket loads of uncertainty, and this has the ability to obstruct the central bank's efforts to take action.

Sterling/Dollar remains under pressure on the daily charts below 1.3500. Sustained weakness under this level should open a path lower towards 1.3350. A weekly close below 1.3350 may signal a further decline towards 1.3150.

Dollar set for best weekly gain in 2017

It has certainly been a positive trading week for the greenback, as hawkish comments from Fed officials and renewed optimism over Trump’s tax reforms, stimulated buying sentiment towards the currency.

Dollar bulls were revitalized this week, after Fed Chair Janet Yellen emphasized the need for gradual rate hikes. Trump’s tax reform blueprint, which he says will be the largest tax cut in the history of nited States, also gave a boost to sentiment towards the U.S. economy. With U.S. economic growth for the second quarter revised higher at 3.1%, the ingredients for the Fed to raise U.S. interest rates in December are falling into place.

From a technical standpoint, the Dollar Index is turning increasingly bullish on the daily charts. Although the dollar extended losses against a basket of currencies on Friday, on the back of profit taking, buyers still remain in control above 92.50. While optimism over the U.S. economy is likely to keep prices buoyed, a catalyst may be needed to jolt the index back above 93.50. This could come in the form of a solid U.S. jobs report next week.

Euro rises on positive economic fundamentals

Euro bulls were active on Friday, after data released in the previous session showed that Eurozone economic confidence hit its highest level in more than 10 years in September.

While the euro may edge higher in the short term amid the positivity, political uncertainty in Europe is likely to create headwinds for bulls down the road. As we head into the final trading quarter of 2017, the EUR/USD could be in store for a rough and rocky ride. With the dollar regaining its mojo amid rising rate hike expectations and the euro finding support from QE taper expectations, bulls and bears are gearing for a tough tug of war.

From a technical standpoint, the EUR/USD is under pressure on the daily charts. Previous support around 1.1850 could transform into dynamic resistance that encourages a further decline towards 1.1680. Repeated weakness below this price should signal an end to the weekly bullish trend, with the next level of interest at 1.1500.

Commodity spotlight – Gold

Gold tumbled to its lowest level since August during Thursday’s trading session, and headed for the biggest monthly decline this year, as optimism over Trump’s tax reforms boosted the U.S. dollar.

The downside was complimented by firmly hawkish comments from Janet Yellen earlier in the week, which reinforced expectations of a U.S. interest rate hike in December. With the dollar likely to appreciate further, amid rate hike expectations and optimism over tax reforms, gold remains vulnerable to further losses. Although the yellow metal has edged slightly higher during Friday’s trading session, bears remain in control under $1300 with breakdown below $1280, opening a path towards $1267.

About the Author

Lukman Otunuga is an FXTM research analyst