Forex Outlook and Analysis
Investors could come to the conclusion that the policies in the coming years would be around lower tax, higher government spending especially on infrastructures, less regulations. Industrial and financial stocks benefited most from such expectations.
While USDollar was overwhelmingly strong for the week, it should be noted that GBP was indeed the strongest. GBP continued to ride on the recent turn in Bank of England’s stance to neutral. Meanwhile, there was additional boost from talks that Donald Trump would be a better ally to UK than the Obama administration. And soon will be a better trade US/UK trade deal. Secondly, the potential of US lowering its NATO commitments would improve UK’s position in Brexit negotiation. The Japanese Yen ended as the weakest major currency on strong risk appetite. That’s followed by Kiwi after RBNZ rate cut. And then EUR followed on uncertainty on what ECB would do after the current quantitative easing program ends next March.
We are bullish on USD after Trump victory.
Trump’s focus on boosting economy and cutting taxes suggest a fiscal stimulus boost to growth US economy.
Trump has suggested that higher tariffs would be directed against more open economies (Mexico and China etc), implying bilateral USD strength.
Corporate tax reform would likely include a repatriation taxholiday which would incentivize repatriation of foreign currency into USDollar.
The policy mix now has shifted in the direction of more inflation, which means that – given how dovish market pricing has been – there is room for the USDollar to catch up with where it should have been quite some time ago.
We are expecting USDollar to rise around 10 percent on a trade-weighted basis over the next three months.
EURUSD forex pair surged initially to 1.1298 last week but reversed and dived through 1.0850 support. The development indicates that choppy fall from 1.1615 has resumed. Initial bias remains on the downside this week, targeting 1.0517 low. On the upside, above 1.0953 minor resistance will turn bias neutral and bring recovery. Otherwise, we’ll stay bearish and expect a new low below 1.0461 at a later stage.
The euro is falling for the fifth day in a row against the US dollar and is about to post the lowest daily (and weekly) close since January.
In order to recover some strength, EURUSD needs to rise back and hold above 1.0850. On a wider perspective the euro could gain momentum, if it recovers above the 1.0950 area, where the 20-day moving average stands.