General market theme
On Friday the main theme in the currency markets was a very strong dollar rally against all of its major rivals which was initially triggered by the bullish inflation reading from the US. However the main reason behind this advance was not the inflation data but rather the Fed meeting next week, where the central bank committee will decide whether to raise interest rates and provide us with their forward guidance.
So even though a rate hike now seems extremely difficult, we believe that the Fed will prepare investors for a rate hike in the final few months of the year. It seems that investors share this opinion given the reaction of the dollar on Friday. The week ahead of us will provide with plenty of opportunities to trade fresh news and speculations about the upcoming Fed meeting.
Price action highlights
The euro dropped lower on Friday when the US inflation reading ticked higher, and proceeded to reach as low as the 1.1150 area as the dollar took control of the pair. The decline came on the back of a few days of trading sideways, and now the euro has picked a direction and the question becomes whether the single currency is ready to maintain its momentum.
To the downside the immediate target is the 1.1100 area, and to penetrate lower a rather bullish Fed statement about their forward guidance will be needed.
The cable dropped rather heavily on Friday as a result of two separate forces: the advance of the dollar as the Fed meeting is drawing closer and investors are building their dollar portfolios as we explained above, but also due to fresh Brexit chatter.
According to reports the UK Chancellor mentioned that it is likely that the UK will have to forfeit their access to the Eurozone single market to establish the immigration restrictions they want and we know that this would be disastrous for the financial sector. The pound reached as low as 1.3000 and we know need to see how it will pick itself up moving forward.
Focus of the day
There’s nothing really on the calendar today to attract investors’ attention so it is likely that trading action will be less volatile and with limited momentum. Since we have no fresh drivers today investors will most likely take their cue from Friday’s developments, so after a limited pullback in most majors we’d like to see whether the dollar will pick up pace again today and attempt to continue its advance.
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