Dollar weakness rattles currency markets

Dollar bears were installed with inspiration following the weak U.S productivity data, which created a cloud of uncertainty over the likelihood of the Federal Reserve raising US rates in 2016.

U.S productivity has fallen for the third consecutive quarter which may simply heighten fears of a deceleration in Q3 GDP consequently obstructing efforts taken by the Fed to break the trend of central bank caution. Although July’s blockbuster NFP of 255k initially bolstered expectations of a probable rate hike as close as September, investors have returned to normality with the CME FedWatch tool displaying a 40.6% probability of a December hike. Overall despite Tuesday’s soft productivity data, sentiment still remains somewhat bullish towards the Dollar and the encouraging outlook towards the US economy could provide a foundation for bulls to send the Dollar Index higher.

Stock market rally cools

Stock markets displayed signs of exhaustion during trading on Wednesday as the combination of weakening oil prices and lingering concerns over the global economy eroded investor risk appetite. Asian shares retreated from the near yearly highs with the Nikkei sinking lower after the Yen rebounded from risk aversion. Although European stocks were elevated on Tuesday from the positive earnings, the bearish domino from Asia could punish Europe as investors are repelled from riskier assets. Wall Street continues to charge into gains but questions could still be asked over the sustainability of the current stock market rally. Fears over the global economy are still visible while depressed oil prices continue to weigh on overall sentiment. The ingredients for a bear market can be seen with bears lying in wait for the current market correction to come to an end before installing a heavy round of selling.

Sterling still under pressure

The Sterling/Dollar lurched higher during trading on Wednesday and this has nothing to do with an improved sentiment towards the Sterling but Dollar weakness. Sentiment towards the Sterling remains firmly bearish with further declines expected as the growing expectations of the BoE cutting UK rates to near zero encourages sellers to attack. From a domestic standpoint, UK manufacturing has repeatedly displayed signs of weakness while the recent regional PMI’s painted a discouraging picture. Uncertainty is still a recurrent theme which continues to haunt investor attraction towards the Sterling consequently obstructing upside gains. Sterling/Dollar remains bearish and the divergence in monetary policy between the BoE and Fed could entice bears to send prices towards 1.2800.

WTI Crude trades towards $42

WTI Crude was pressured this week as U.S government forecasters raised their outlook for production which added to the concerns over the excessive oversupply of oil in the global markets. The selling pressure intensified on Wednesday following news that Saudi Arabia pumped production to record highs of 10.67 million barrels a day in July to meet the summer usage. Although there have been talks by some OPEC members over a potential freeze on output, this may do little to quell the bear rally with further declines expected as persistent oversupply concerns haunt investor attraction. WTI is fundamentally bearish with the toxic combination of oversupply fears and faltering demand could encourage sellers to send prices towards $40.

Commodity spotlight – Gold

Gold displayed an incredible rebound during trading on Wednesday with the metal lurching back above $1350 as Dollar weakness encouraged bullish investors to install a heavy round of buying. This yellow metal is becoming increasingly sensitive to US interest rate rise expectations and explosive movements could become commonplace as the Fed policy meetings loom. Although optimism has slightly deteriorated over the Fed taking action anytime soon following the weak U.S productivity data, there is still a 40% likelihood that action may be taken in December potentially capping upside gains. Gold remains engaged in a fierce tug of war against risk aversion and US rate hike expectations with risk aversion currently dominating. Bulls may be commended on their ability to propel Gold to such levels and a daily close back above $1365 could encourage buyers to propel prices higher.

Otunuga is a research analyst at FXTM