USD Slips Lower While Gold Markets Could Become Interesting

New York (Mar 29)  The US Dollar Index is sliding marginally lower against its trading partners following the news that fourth quarter US GDP remained unchanged against its previous revision. Although the initial reaction shows that there is a slight bit of disappointment that the GDP figure was not revised higher as some expected, the data itself is not disappointing at all, and the Federal Reserve will be satisfied that the previous quarter saw the largest gain in consumer spending for around eight years. However, all traders are interested in right now is when the Federal Reserve will pull the trigger and begin to raise US interest rates, and although the USD bulls might not receive the rate hike they want in June – they will still receive an interest rate increase at some point this year.

If anything, the GDP figure not being revised higher just provides a little bit of leeway for the Federal Reserve to be cautious, and in some ways hesitant, towards raising interest rates so soon. I find it slightly peculiar that some have spoken about the recent USD softness as the beginning of a correction, because it is nothing other than traders taking profit after what has become a solid and lengthy USD rally. There will be times when traders show impatience, as with the FOMC statement last week, and suddenly begin to close USD positions, but the overall USD uptrend is going to remain supported for as long as optimism remains that the Federal Reserve will still raise interest rates.

I do think the USD rally will reignite once traders receive clarity on the potential timing of a US interest rate increase. At the end of the day, the Federal Reserve are going to be able to raise interest rates before the overwhelming majority of central banks can even contemplate the idea. The driver behind the USD rally has not only been the timing of when the Fed could raise rates, it has also been because so many other central banks (over 20 this year) have eased monetary policy. Overall, the complete contrast in global central bank policy will remain the dominate driver in currency market volatility for some time yet.

As things currently stand, the EURUSD looks set to welcome its second successive day of losses for the first time in over two weeks. Upside gains remain limited to USD softness and it has been quite clear from the rally over the past week that the pair faces stubborn resistance around the 1.1040 area, which is preventing the opportunity to trade higher. While it is true that the economic data in Europe is beginning to improve, there is nothing to say that the slightly stronger data is not linked to budgets being eased following the dramatic decline in the price of oil – rather than the ECB’s continuous stimulus measures to improve economic fortunes having the desired impact.

Speaking of oil, I am not surprised that WTI is erasing gains following the bounce encountered after the unexpected announcement that a Saudi Arabian coalition launched airstrikes against rebels in Yemen. Personally, I think that investors used the unexpected news about airstrikes as an excuse to push the price of WTI higher. Yemen is not an oil producer of great significance and was previously seen as only the 39th largest producer of oil. Why were investors encouraged to push prices higher? They were intrigued because Yemen’s geographic location is extremely close to Saudi Arabia and this nation, among others, getting involved in the escalating conflict encouraged suspicions that oil production in the Middle East region might be disrupted.

In order for the gains in oil to be maintained, disrupted production actually needs to be seen. Otherwise, the risk of a sudden pullback will remain high purely because the economic conditions for the commodity have not changed in the slightest.

Gold is also erasing its gains, but I would prefer the chances of Gold continuing to progress than I would WTI Oil. There are two main reasons why I think this could be possible, with the first being that the Federal Reserve will remain in no hurry to begin raising interest rates. The second reason is because reports have circulated that Egypt, Jordan, Sudan and Pakistan might be ready to take part in a ground offensive in Yemen. If this were to occur, then there are substantial chances for a sudden appetite from investors for a safe-haven.