After yesterday’s Thanksgiving holiday in the US, we’ll continue to highlight some of the recent themes we have seen emerging ever since the Trump election victory. In the FX world and of all the major currency pairs, the dollar is set to cap its biggest three-week gain versus the yen since 1995 as traders view a US interest rate increase next month as a certainty. The market is pricing 100% odds of a Fed rate hike next month plus and probably more tellingly, market expectations have increased for higher US interest rates going forward. As highlighted earlier in the week, the greenback has surged about 10% since November 4th to an eight month high against the Japanese currency. Earlier this week we also commented on the recent jump in commodity prices in response to the expected Trump fiscal bounce, however, this hasn’t been across the board with counter cyclical gold prices falling to nine month lows. Higher borrowing costs tend to hurt gold bullion prices as they don’t pay interest or bear yields.
Yesterday, as expected trading in the US dollar took a bit of a breather with levels way down on the back of markets being closed there. If anything, the USD has given back a fraction of its recent gains across its main peers. From a sterling perspective, it put in another strong shift against the single currency hitting a new recent low at .8463 (GBPEUR high of 1.1816) putting it closer to a significant key level that we discussed yesterday morning. We remain below the 50% retracement mark of the post Brexit rally to the post ‘flash crash’ high and are now looking towards the 200 Day Moving Average (Exponential) at .8400 (GBPEUR 1.1905). As political risk is likely to be the main driver of this pair going forward, we expect further wider than normal swings with normal forecasting models not as accurate as before.
We expect market liquidity to be on the thin side today, as many US participants take the long weekend after yesterday’s Thanksgiving holiday and look to bump retail sales there with their Black Friday phenomenon. There are some economic events to keep an eye on such as UK GDP, albeit the second reading for Q3 figures. The initial estimate previously showed a Q3 year on year growth rate of 2.3% and as tends to be the case with revised estimates, we don’t expect any material changes there. Then later in the day, we have some key US Trade Balance data followed by flash PMI figures for November. With the market now pricing next month’s rate hike as a done deal, only huge variations from market consensus is likely to have any material market impact.