1. Speculators increased their bullish bets on the American Dollar during the 1st week of the year
The latest Commitment of Traders (COT) report from the Commodity Futures Trading Commission (CFTC) shows that non-commercial traders increased their bullish bets for the US dollar during the first week of 2017, continuing on from 2016’s bullish finish. The US Dollar’s bullish positions have therefore been increasing for 2 weeks in a row.
This report is important for your trading, as it measures the sentiment of influential traders over a period of time. You will then be able to determine market sentiment extremes, which might describe market tops/bottoms. While reading this report, remember that positions from non-commercial traders will indicate the trend’s direction, as they are large speculators trying to make money from their trading activities by following the trend.
2. Trump’s planned economic policies bode well for US growth
The exponential market rally since Donald Trump’s election has been impressive. We can only hope this will continue into the New Year as well. On the 20th of January, Donald Trump will be officially sworn in as President of the United States – naturally, market participants will be closely watching his first actions as President.
His economic program - with tax cuts for households and businesses, massive infrastructure program and incentives to bring back manufacturers/profits in the US, will potentially increase US growth and the value of the US Dollar. But with such a program, deficit will go up. As an example, to fully pay for the cuts without adding to the federal budget deficit, government spending must be reduced by 20%.
His intended policies have been interpreted as beneficial to the US by traders, which in turn have led to a higher USD, as more rate hikes are now expected. His large tax cuts and wider deficits might actually support consumer spending and economic growth at first. But we might rapidly see negative impacts rising, especially from higher interest rates caused by the important deficits and higher inflation.
Inflation can be described as a sustained increase in the general level of prices for goods and services. The FED’s inflation goal is a PCE indicator at 2%. Given Trump’s policies, inflation could very well increase faster than initially planned, and the FED might decide to increase rates faster than expected.
Higher interest rates generally push the US dollar higher and slow the economy. A strong dollar may eventually also be problematic for US growth, as exports will be more expensive to foreign buyers.
Even if the American economy is seen as strong with full employment, a rising dollar will still be considered as a headwind, as it will probably reduce the total effective demand. On the other hand, the advantages for the American consumers might offset the negative aspect of a strong dollar. A stronger dollar makes imports cheaper to domestic consumers, which may lead to higher spending. Remember that personal consumption represents more than 60% of the GDP!
3. Uncertainty rising across European political landscape
2017 will see the French presidential elections, the legislative elections in Germany and the new Italian government, among others, which could all potentially affect markets. The BREXIT timetable will also play an important role in Europe stability, depending on how the negotiations will be held. This will be closely monitored.
Political uncertainty and instability will likely continue to grow this year, with more dissatisfaction and distrust of governments.
EUR/USD outlook
A survey conducted by Reuters shows that the USD is likely to remain strong this year in the face of the numerous upcoming rate hikes and the future President’s economic policy. As nationalism continues to take hold across different countries, political uncertainty in Europe will weigh on the stability of the Euro Zone, and thus on its currency.
Prices are currently in an ascending channel, but the bearish Ichimoku cloud is thick, and it might be difficult for prices to cross it. The Lagging span (green curve) is above prices, but still need to cross the Tenkan line (red curve) and the Kijun line (blue curve). Prices are also trading just below a resistance line at 1.0565.
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