As of January 15, 2024, several factors are impacting the price of the US dollar (USD).
Interest Rate Expectations: The U.S. dollar has largely stalled its rebound, consolidating around the 102.00 level in recent days. U.S. interest rate expectations shifted in a dovish direction last week, with traders pricing in nearly 160 basis points of easing for the year. This dovish shift in interest rate expectations has led to a consolidation of the U.S. dollar’s recovery.
Federal Reserve Policy: Futures imply a 79% probability the Federal Reserve will cut rates as soon as March, with soft producer price data offsetting a disappointing consumer price report. Analysts at Barclays noted the Fed’s favored core personal consumption price index looked set to continue running at or below 0.2% month-on-month, softer than expected, leading to an expectation for the first Fed cut from June to March.
Economic Data: The US Dollar faces a number of headwinds including declining yields, more imminent prospect of rate cuts, and easing price pressures. Despite last month’s slightly hotter CPI readings, inflation is expected to continue dropping as prior base effects are likely to have come to an end
Geopolitical Tensions: The USD appears to be holding onto the range due to its safe haven appeal after the joint US and UK strikes on Houthi targets at the end of last week.
In the coming days, several Fed officials will have public appearances, so it is important to watch whether policymakers start pushing back against Wall Street’s dovish expectations. If they do, yields and the U.S. dollar may head higher.
Upcoming Events for the week:
The currency markets are bracing for a week filled with significant economic data from the UK, Eurozone, US, and Japan, which could create ripples across forex trading desks. In the UK, employment data will take center stage with the Employment Change and Claimant Count Change showing a mixed picture; an increase in employment could provide the GBP with some upward momentum, but any negative surprises in the unemployment rate or a higher claimant count could offset gains. These labor market indicators will be critical for the Bank of England’s policy outlook and therefore for the GBP’s movement.
For the Eurozone, CPI data will be the highlight. Given that the actual CPI has come in higher than the previous value, inflation concerns may intensify, possibly pressuring the European Central Bank to consider more aggressive policy tightening, which could strengthen the EUR.
Across the Atlantic, the US will report on retail sales and building permits, alongside jobless claims. The retail sales data, particularly excluding auto sales, appears to be in line with expectations, suggesting steady consumer spending. However, any deviations in the jobless claims could influence market sentiment regarding the health of the US labor market and the potential for future rate hikes by the Federal Reserve, with implications for the USD.
In Japan, the inflation rate year-on-year is a touchstone figure, with an expected increase that may raise concerns over the Bank of Japan’s (BoJ) long-standing battle with deflationary pressures. If the inflation figure comes in as forecasted, it could indicate that the BoJ’s ultra-loose monetary policy might be due for a reassessment, potentially impacting the JPY.
Overall Market Sentiment:The aggregate market sentiment for the week could be described as one of cautious anticipation.
- With the UK’s mixed labor data, the sentiment towards the GBP could be tentatively optimistic with a sentiment breakdown of 50% Positive, 30% Negative, and 20% Neutral.
- The EUR might see a sentiment shift towards cautious optimism due to inflation concerns, with a possible breakdown of 55% Positive, 25% Negative, and 20% Neutral.
- For the USD, with retail sales showing stability but the potential for job market data to sway sentiment, a breakdown could be 45% Positive, 35% Negative, and 20% Neutral.
- The JPY’s sentiment will hinge on the inflation rate, with possible outcomes skewing towards a neutral to slightly positive outlook, especially if the BoJ hints at policy shifts, with a breakdown of 40% Positive, 40% Negative, and 20% Neutral.
Overall, the week promises to be a dynamic one for currency markets, with each data release having the potential to shift investor sentiment and currency valuations.
EURUSD: Week Ahead Technical and Fundamental Forecast
Scenario 1: Bullish EURUSD
- Retail Sales Momentum: If the EUR Retail Sales MoM and YoY exceed expectations, it may signal economic strength in the Eurozone, bolstering the EUR against the USD.
- GBP Unemployment Data: An improvement in the UK’s employment situation could support the EUR through regional economic confidence, potentially lifting EURUSD.
Scenario 2: Bearish EURUSD
- US Retail Strength: Should US Retail Sales data outperform, indicating robust consumer spending, the USD may gain strength against the EUR.
- Inflationary Pressures: Higher US inflation rates YoY could reinforce expectations of aggressive Fed policy, potentially boosting the USD.
Scenario 3: Mixed/Neutral EURUSD
- Offsetting Data Points: Mixed data, with strong retail sales in the Eurozone but equally strong US CPI figures, might lead to uncertain market direction, balancing the forces on EURUSD.
- Market Caution Pre-ECB Speech: Traders may hold positions or react cautiously ahead of ECB Guindos’s speech, leading to neutral market movements.
- Balanced Employment Effects: If UK employment data show moderate changes, the market may not react strongly, leading to a neutral impact on the EURUSD.
Scenario 1: Bullish EURUSD
- Fibonacci Support: EURUSD finding support at the 0.5 Fibonacci level may indicate potential for a bullish reversal.
- RSI Momentum: An RSI trending upwards, crossing the 50 level, could signal increasing buying pressure.
- Price Above Moving Averages: Maintaining a position above key moving averages may suggest bullish sentiment among traders.
Scenario 2: Bearish EURUSD
- Resistance at 0.618 Fibonacci: Failure to break above the 0.618 Fibonacci level could lead to a bearish outlook.
- RSI Rejection: An RSI failing to sustain above the 50 level might indicate a loss of bullish momentum.
- Moving Averages as Dynamic Resistance: If the price is unable to stay above the moving averages, these could serve as dynamic resistance, reinforcing a bearish trend.
Scenario 3: Mixed/Neutral EURUSD
- Indecision Within Fibonacci Levels: EURUSD trading between the 0.5 and 0.618 Fibonacci levels without a clear breakout could signify indecision.
- RSI Around Mid-Level: An RSI fluctuating around 50 would reflect a lack of strong market conviction.
- Converging Moving Averages: Moving averages that are close together or flat might indicate a lack of trend strength, suggesting a neutral stance.
- Bullish Scenario: A stronger-than-expected performance in Eurozone retail sales could tip the sentiment towards a bullish EURUSD.
- Bearish Scenario: Higher US inflation and robust retail sales data may lean the sentiment towards a bearish EURUSD.
- Mixed/Neutral Scenario: In the absence of clear directional economic data or if there is balanced data from both the Eurozone and the US, the market sentiment could remain neutral, resulting in a range-bound EURUSD.
GBPUSD: Week Ahead Technical and Fundamental Forecast
Fundamental Analysis
Scenario 1: Bullish GBPUSD
- Improving Employment Data: If the UK Employment Change and Claimant Count Change indicate a stronger job market, this could lead to a bullish sentiment for the GBP.
- Decreasing Unemployment Rate: A drop in the Unemployment Rate below the forecast could further strengthen the GBP as it suggests economic health.
Scenario 2: Bearish GBPUSD
- Strong US Retail and Inflation Data: If US Retail Sales and CPI data outperform expectations, the resultant USD strength could lead to a bearish scenario for GBPUSD.
- Positive US Housing and Job Data: Indicators of a robust US economy, such as Building Permits and jobless claims, could also pressure GBPUSD downward.
Scenario 3: Mixed/Neutral GBPUSD
- Conflicting Data: If UK employment data is strong but US Retail Sales also show significant growth, it may lead to mixed signals and a neutral impact on GBPUSD.
- Market Uncertainty: Ahead of the ECB speech and mixed economic releases, traders might adopt a wait-and-see approach, resulting in a neutral trend.
Technical Analysis
Scenario 1: Bullish GBPUSD
- Fibonacci Support: GBPUSD maintaining support above the 0.5 Fibonacci level could indicate a bullish scenario.
- RSI and Momentum Trending Up: An RSI moving above 50, along with positive momentum, could signal an uptrend continuation.
- Price Action Above Moving Averages: The GBPUSD trading above key moving averages would support a bullish outlook.
Scenario 2: Bearish GBPUSD
- Fibonacci Resistance: Inability to breach the 0.618 Fibonacci level could signal a bearish reversal.
- RSI Below Mid-Level: An RSI remaining below 50, especially if momentum is negative, would suggest bearish sentiment.
- Price Below Moving Averages: If GBPUSD is trading below moving averages, it may indicate downward momentum.
Scenario 3: Mixed/Neutral GBPUSD
- Range-Bound Within Fibonacci Levels: Fluctuation between the 0.5 and 0.618 Fibonacci levels without a clear breakout could suggest a lack of market consensus.
- RSI Around 50: An RSI that stays around the mid-level could indicate indecision among traders.
- Moving Averages Convergence: Converging moving averages without a clear direction might signal a neutral stance in the market.
- Bullish Scenario: The sentiment could lean towards bullish for GBPUSD if UK employment figures significantly surpass expectations.
- Bearish Scenario: Strong US data, particularly in retail and inflation, may tilt the sentiment towards bearish for GBPUSD.
- Mixed/Neutral Scenario: A combination of strong UK employment data with solid US economic indicators could result in a neutral sentiment, with GBPUSD potentially seeing range-bound trading.
USDJPY: Week Ahead Technical and Fundamental Forecast
Fundamental Analysis
Scenario 1: Bullish USDJPY
- Positive US Economic Data: Strong readings from US Retail Sales and CPI data could indicate continued economic growth, potentially strengthening the USD against the JPY.
- Improving Employment Data: If US jobless claims figures show a decline, it would signal a strengthening labor market, which could support the USD.
Scenario 2: Bearish USDJPY
- Weaker US Data: Disappointing US economic figures, especially in retail and inflation, could weaken the USD as they may lead to dovish Fed policy expectations.
- JPY Inflation Rise: Higher Japanese inflation rates may boost the JPY as they could suggest a shift towards tighter monetary policy by the Bank of Japan.
Scenario 3: Mixed/Neutral USDJPY
- Offsetting Data: Mixed outcomes, with positive US job data but disappointing retail sales, might lead to uncertain market direction for USDJPY.
- Market Digestion: Traders might show a mixed reaction to the data, potentially leading to a neutral impact on USDJPY as they await clearer economic trends.
Technical Analysis
Scenario 1: Bullish USDJPY
- Breaking Fibonacci Resistance: A clear break above the 0.618 Fibonacci level could suggest a bullish trend.
- RSI Above 50: An RSI consistently above the 50 mark indicates gaining momentum, supporting a bullish scenario.
- Price Movement Above Moving Averages: USDJPY remaining above key moving averages could signal a continued uptrend.
Scenario 2: Bearish USDJPY
- Fibonacci Rejection: Failure to move past the 0.618 level may indicate a bearish reversal.
- RSI Dropping Below 50: An RSI moving below the midline suggests increasing selling pressure.
- Price Below Moving Averages: A consistent trade below key moving averages could confirm a bearish trend.
Scenario 3: Mixed/Neutral USDJPY
- Consolidation Within Fibonacci Levels: Fluctuation between the 0.5 and 0.618 Fibonacci levels without a clear breakout could indicate indecision in the market.
- RSI Hovering Around Mid-Level: An RSI that remains around the 50 level might reflect a lack of momentum in either direction, suggesting market neutrality.
- Price Oscillation Around Moving Averages: If USDJPY hovers around the moving averages without establishing a clear trend, it may suggest a neutral market stance.
Overall Market Sentiment
- Bullish Scenario: Should the US data consistently outperform, fostering expectations of a robust economy, the sentiment could be bullish for USDJPY.
- Bearish Scenario: Conversely, if the US data disappoint and Japanese inflation rates increase, this could shift sentiment to bearish for USDJPY.
- Mixed/Neutral Scenario: A combination of mixed economic indicators from both the US and Japan could result in a neutral sentiment, leading to a range-bound USDJPY.
XAUUSD (Gold): Week Ahead Technical and Fundamental Forecast
Scenario 1: Bullish XAUUSD
- Weakening USD on Poor Retail Data: If US Retail Sales figures are significantly below expectations, this may weaken the USD, typically resulting in a bullish scenario for gold (XAU).
- Inflation Concerns: Higher than expected CPI figures could increase inflation concerns, which traditionally benefit gold as a hedge against inflation.
Scenario 2: Bearish XAUUSD
- Strong USD Economic Indicators: If US data, particularly Retail Sales and CPI, come in stronger than expected, the resultant USD strength could lead to a bearish trend for gold.
- Positive Risk Sentiment: Improved economic outlook from the US could increase risk
appetite, reducing the appeal of gold as a safe-haven asset and potentially leading to a sell-off in XAUUSD.
Scenario 3: Mixed/Neutral XAUUSD
- Mixed Economic Data: If the economic data release is mixed, with some indicators showing strength and others weakness, the impact on gold may be muted, leading to a neutral trend.
- Uncertainty Ahead of Major Data Releases: Traders might exhibit cautious trading behavior ahead of high-impact data releases, resulting in a range-bound market for gold.
Scenario 1: Bullish XAUUSD
- Rebound from Fibonacci Support: If gold prices bounce off the 0.382 Fibonacci retracement level and move higher, this could indicate a bullish reversal.
- RSI Turning Upwards: An upward tick in the RSI from near the oversold
territory may suggest that the selling pressure is subsiding and could precede a bullish trend reversal.
- Break Above Moving Averages: Should XAUUSD break above and hold ground over key moving averages, it could signal the start of a bullish phase.
Scenario 2: Bearish XAUUSD
- Failure to Breach Resistance: Difficulty in surpassing the 0.236 Fibonacci retracement level may suggest that bearish sentiment remains intact.
- RSI Decline: An RSI that continues to trend downwards towards oversold conditions could indicate a strengthening bearish momentum.
- Price Staying Below Moving Averages: Persistently trading below the moving averages would confirm the bearish market sentiment and potential for further declines.
Scenario 3: Mixed/Neutral XAUUSD
- Sideways Movement: Trading between the 0.382 and 0.236 Fibonacci levels without a clear breakout can lead to a consolidation pattern, indicating a neutral market.
- RSI Around 50: An RSI that hovers around the mid-point suggests a balance between buying and selling pressures.
- Price Oscillation Around Moving Averages: If the price fluctuates around the moving averages without establishing a clear direction, it may suggest indecision among traders.
- Bullish Scenario: The sentiment could become bullish for XAUUSD if inflation fears rise or USD weakens due to poor retail performance.
- Bearish Scenario: Strong US economic performance could foster a bearish sentiment as it may boost USD and diminish gold’s appeal.
- Mixed/Neutral Scenario: Mixed or inconclusive economic data from the US could result in a lack of clear direction for the markets, leading to a neutral sentiment for XAUUSD. Gold prices may oscillate within a narrow band, reflecting the market’s indecision.
USD: Neutral with cautious undertones. Interest rate and Fed policy dynamics, along with geopolitical tensions, contribute to a mixed outlook.
EUR: Cautiously optimistic, buoyed by potential inflation-driven ECB policy tightening and regional economic strength.
GBP: Cautiously optimistic, largely dependent on the UK’s labor market data and broader economic indicators.
JPY: Neutral to slightly positive, influenced by inflation data and global risk dynamics, balanced by domestic economic conditions.
Gold (XAU/USD): Mixed/Neutral, with opposing forces from USD performance and inflation concerns influencing sentiment.
The upcoming week presents a complex tapestry of economic events and data releases, each with the potential to significantly sway market sentiment and currency valuations. The overall sentiment is cautiously optimistic for the EUR and GBP, mixed/neutral for the USD, gold, and JPY, with key risks stemming from central bank policies, economic data releases, geopolitical tensions, and global risk sentiment. Investors should remain vigilant, as these factors could lead to heightened volatility and rapid shifts in market dynamics.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
