STO Fundamental - Greenback gains ahead of Fed.

We have a relatively quiet day in terms of economic data but the political agenda remains very much in focus with Dutch voters participating in the country’s general election tomorrow. Although there’s no real belief that the far right can end up in government, the risk seems to revolve around the idea that a shift in sentiment here could be a precursor for what happens in France at the end of April.

The Traders’ View

Our prop desk is building a series of short Euro positions across a range of pairs including GBP, USD and JPY. On the flip side, attempts to profit from a sell-off in equity markets are once again proving costly.

Fundamentals – Greenback gains ahead of Fed.

The US dollar is finding support ahead of tomorrow’s FOMC verdict that is fully expected to see a quarter point rate hike, but even more critically may see the Fed adopt a more hawkish tone in its rhetoric. Testament to this is the fact that pairs such as AUD/USD are currently unwinding despite that marginally better than expected Chinese industrial production data we saw released overnight and this pattern may well continue in the day ahead. A lacklustre US PPI print at 12.30pm GMT could upset this pattern in the short term, but any weakness is likely to be short lived with that next rate hike looming.

After yesterday’s brief foray above 1.07 for EUR/USD, a degree of weakness has returned again for the pair with rising US treasury yields and expectations over tomorrow’s FOMC comments weighing. There’s certainly a belief that the economic outlook for the Eurozone is improving and the political uncertainty that was high on the agenda at the start of the year seems to be abating, too. Any scope for an upset in tomorrow’s Dutch elections seems limited, and in the short term the German ZEW survey is forecast to produce another upbeat set of readings, too. Downside potential for the pair could well be limited.

Those improving US treasury yields and anticipation over the Fed’s tone tomorrow are serving to weigh on gold prices. The precious metal is just about holding above $1200/oz right now, but we’re above recent lows so any hints that a quicker pace of policy tightening will be delivered from across the Atlantic does have the potential to produce more weakness here. We’re still well above those lows struck in the run up to Christmas, so there’s certainly profits that could be booked.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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