U.S. Dollar Looking Weaker, Could Offer Some Relief for Currencies

The US dollar was showing signs of weakness on Friday although the buck has now posted a three week rally. Despite the US markets were closed on Thursday and Friday marked by thin trading volumes, the dollar fell 0.27% and could potentially mark a much needed correction in prices.

Last week was a short trading week but not before some high impact news releases. The US durable goods orders rose 4.8% in October and beat the estimates of 1.7%. Excluding the transportation sector, durable goods orders rose 1.0%. The gains in the headline print came after aircraft orders rose by nearly 94%.

The Fed’s FOMC meeting minutes were also released last week and the minutes showed that the central bank was ever closer to hiking interest rates. The markets now expect the December rate hike to be a done deal which will see the US short term interest rates rise to 0.75%. There is simply no reason for the Fed to delay rate hikes at this point in time.

By Friday’s close, the CME Futures probability for a rate hike stood at 93.5%.

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CME Futures Fed Funds probability tool (Source: CME Group)

The stronger dollar sent gold prices tumbling to a 9-month low while EURUSD was beaten down to an 11-month low. Still, if Friday’s price action is anything to go by, we could expect to see the dollar pull back from its gains this coming week.

The week ahead will see traders looking forward to the final trading month of the year and the economic calendar picks up steam by Thursday. November’s ISM manufacturing PMI and payrolls report will be on the top of the agenda this week as it marks the final few key important data sets before the Fed meets in two weeks times.

It is unlikely that even a temporary setback will hold off the Fed from raising interest rates, meaning that the US dollar’s pull back could offer additional buying opportunity in the markets. Many experts believe that there is still room for the dollar to run higher supported by expectations of president-elect Trump’s fiscal spending plans and a broad increase in inflation expectations and last but not the least a noted improvement in the US economic data.

Based on the current set of economic data, the AtlantaFed’s GDP Now model is forecasting a fourth quarter GDP growth rate of 3.6%. If the US economy continues at the current pace, then the fourth quarter GDP could be the highest since Q4 of 2014.

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AtlantaFed GDPNow Forecast for Q4 2016: 3.6%

Heading into this week’s data, the market consensus expects the ISM manufacturing PMI to post a third straight month of gains with the index forecast to rise to 52.1 from October’s 51.9. On the jobs front, expectations are fairly trimmed with the average payrolls expected to show 165k jobs being added during the month of November, slightly higher than the 161k in October. The unemployment rate is expected to show a steady print of 4.9% same as the previous month, while average hourly earnings are tipped to have increased at a slower pace of just 0.2% in November down from October’s 0.4% increase.

Regardless, the expectations remain high that the US economic growth will continue to push higher which only keeps the dollar supported to the upside.