26 October 2016
Markets are watching to see if the G7 summit of finance ministers has any impact on the US dollar. Photo: Reuters
Markets are watching to see if the G7 summit of finance ministers has any impact on the US dollar. Photo: Reuters

Euro to weaken further to 1.13 against the US dollar

The US Federal Reserve should consider raising rates at its June meeting, Richmond Fed president Jeffrey Lacker told the Washington Post in an interview published Monday.

However, Lacker has no right to vote in the Federal Open Market Committee meetings this year, and the market has ruled out the possibility of a rate hike next month.

Fed funds rates show there is only a 4 percent chance of a rate hike at the Fed’s June meeting.

Market prices suggest there won’t be any rate increase until early 2017, FedWatch data from the Chicago Mercantile Exchange show.

Nevertheless, some investors do believe there might be a rate hike later this year.

And the Fed will closely watch various economic figures before the June meeting.

The euro stabilized above 1.13 against the US dollar early this week but may continue to experience some downside and test the 50-day moving average at 1.13.

If it breaks that support level, it could slip further to 1.12 or even 1.10.

The Group of Seven summit of finance ministers will be held in Japan on Friday.

The US dollar has been in a tug of war against the Japanese yen for the last few days.

Japanese Finance Minister Taro Aso said Tuesday the ministers from the G7 countries will likely discuss currencies and that Japan will stress the need for stability in global foreign exchange markets.

However, very few observers expect the summit to lead to any concrete macroeconomic policy agreement.

But if the US or other countries warn against a currency war, it might push the yen up further.

The US dollar edged up as higher oil prices boosted stocks and US bonds, which also reduces safe-haven demand for the yen. The US dollar rose to 109.6 yen.

Technical analysis shows the market is watching to see whether the US dollar may tumble below the trough of 105.18 yen touched on October 15, 2014.

If the US dollar breaks below that level, it might weaken further.

A 50 percent pull-back based on the cumulative gains between 2012 and 2015 is at around 101.44 yen.

The US dollar failed to overcome the resistance level of 110 yen recently.

The Reserve Bank of Australia published the minutes from its May meeting.

The central bank is less dovish than expected.

As a result, the aussie surged from below US$0.73 to US$0.7368.

The RBA cut its inflation target to the lower end of the 2-3 percent range this year, which has prompted investors to bet on at least one more rate cut this year.

The latest interbank rate futures indicate that the chances of a rate cut before August have dropped from 76 percent to 60 percent.

Meanwhile, technical charts show the aussie has reversed the uptrend against the US dollar early this month and may experience further downside in the near term.

In a 50 percent pull-back, it would ease further to US$0.733, a level close to the 250-day moving average.

Sterling soared to the highest level in two-and-a-half weeks against the euro on Tuesday and rose above US$1.45.

The latest research from ORB shows 55 percent of Britons in favor of remaining in the European Union and 40 percent preferring Brexit.

A phone poll by ICM shows the “remain” side with an eight-point lead over the “leave” side.

Sterling may experience some resistance at US$1.45-US$1.457. It remains to be seen if it can stabilize above the 50-day moving average at US$1.433 in the coming days.

The New Zealand dollar has been consolidating against the US dollar recently. It’s very likely to dip further to US$0.656.

This article appeared in the Hong Kong Economic Journal on May 18.

Translation by Julie Zhu

[Chinese version 中文版]

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Sales director, Emperor Capital Group Limited; HKEJ columnist

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