Following yesterday’s net decline, should we expect more downside for currencies or the broader upside momentum to prevail? Get the viewpoint of analysts at ADS Securities as they shared this 28 March US Dollar Trading Outlook.
28 March, ADS Securities – Elevated volatility and a swift midday change in direction was the theme in the markets yesterday and a lot of investors were caught off guard when the current rallies in place came under threat.
28 March US Dollar Trading Outlook
The US Dollar spiked higher versus the European majors with the Euro and the Pound dropping from their previous highs to record strong losses before the US opening. However, as soon as the US markets came online we witnessed an equally strong recovery that erased most of the losses in the currencies but it was stocks that were hit the hardest during the latter part of the day.
This week is a peculiar one with very little tier-1 data pending for release and with a holiday weekend coming up liquidity should be lower than usual. However, we need to keep in mind that it’s also the end of the month and fiscal quarter which means that large institutions and corporate names are closing off positions to book profits or limit losses.
In an environment of reduced volatility, the effects of this portfolio re-adjustment are always magnified and provide some explanation for yesterday’s erratic price action so we need to remain guarded over the next 72 hours.
Should we expect more downside for currencies?
Looking ahead, the interesting question now is whether we should expect more downside for currencies following yesterday’s net decline or whether the broader upside momentum will prevail. We believe that the market has no reason to change direction at this point. We expect the positive risk appetite to remain the key catalyst which should keep the Euro and the Pound supported versus the Dollar at least until tomorrows’ US PCE inflation data.
Furthermore, the report is expected to print softer this month dampening expectations for a more hawkish Fed stance so the Dollar will struggle to find a reason to rally versus the European currencies. Today’s GDP and Advance Goods reports are not likely to have any strong positive effect on the greenback.
Euro and the Pound to continue trending higher
We’re looking for the Euro and the Pound to continue trending higher but we believe that the UK currency has more chances to break above its recent highs.
ECB’s bearish bias should prevent traders from buying the shared currency with lots of appetites but we think that elevated expectations for the BoE to raise rates in May will prop Sterling above 1.42 again. These odds currently stand at 71% and with good progress in the Brexit talks Pound’s outlook seems to brighten again.
Finally, Dollar/Yen edged towards 106 but our outlook points towards a move to the downside – equities are trending lower and with investors looking for safe havens the Japanese currency should remain in demand.
Equities trend lower
It was a dreadful day for equities yesterday even though the opening bell in Europe was pointing higher. As soon as the US markets came online stock traders started liquidating their positions and given the lack of any news or data to trigger this action we believe that profit-taking ahead of the end of Q1 was the main catalyst.
However, we need to keep in mind that the broader outlook for stocks was already pointing to the downside and Monday’s gains were nothing more than a knee-jerk reaction which intensified the selling momentum.
Looking ahead, the European and US futures are trending lower so we should expect another bearish session for the global bourses and the focus now is on last week’s lows: a break below these levels will attract more selling interest and will clear the path for another leg lower.
ADS Securities Risk Disclaimer
This article was provided by analysts of ADS Securities.
Trading foreign exchange, foreign exchange options, foreign exchange forwards, contracts for difference, bullion and other over-the-counter products carries a high level of risk. All opinions, news, analysis, prices or other information contained in this communication are provided as general market commentary. It does not constitute investment advice. Nor a solicitation or recommendation for you to buy or sell any over-the-counter product or another financial instrument.