Markets nurse rate hike hangover

December 19, 2016 09:02 AM

Stock markets were mostly lower during trading on Monday as investors re-evaluated the likely impacts of higher U.S. rates to the global economy. Asian shares stumbled to four week lows with most emerging market stocks exposed to steep losses as speculations of higher rates sparked concerns of possible capital outflows. With Asia’s bearish momentum potentially compounding to the rate hike hangover, European markets and Wall Street could find themselves pressured today.

Dollar bulls take a break

The bullish impacts of last week’s Fed hawk shocker coupled with repeatedly positive U.S. domestic data could ensure the Greenback charges into 2017 securing gains. Sentiment remains firmly bullish towards the Dollar as the year comes to an end with any weakness in prices seen as a technical correction. Investors may direct their attention towards Thursday’s U.S. GDP report which if exceeds expectations could provide a solid platform for bulls to propel the Dollar Index back towards fresh 14-year highs above 103.50.

Euro remains pressured

Repeated talks of parity between the EUR and USD could ensure the EUR/USD remains depressed through the final trading weeks of 2016. With uncertainty still a recurrent theme in Europe, buying sentiment towards the EUR has taken a turn to the worse while rising rate hike expectations continue to strengthen the Dollar. Sentiment is heavily bearish towards the EUR/USD with sellers potentially receiving an early Christmas gift this month if the visible divergence in monetary policy between the ECB and Fed sparks another sharp selloff. From a technical standpoint, previous support around 1.050 could transform into a resistance which opens a path back below 1.040.

Currency spotlight – USD/JPY

Dollars resurgence has been the engine behind the phenomenal gains displayed on the U.S. dollar/Japanese yen (USD/JPY) currency pair in Q4. This pair remains heavily bullish on the daily timeframe with prices expected to clip 120.00 in 2017 if the bullish momentum holds. Some attention may be directed to the BoJ policy meeting which most expect to conclude with policy measures left unchanged. The BoJ remains notorious for surprises and any unexpected shockers could create explosive levels of volatility in the USD/JPY. Technical traders may continue to observe how the USD/JPY reacts to the 118.50 resistance.

Commodity spotlight – Gold

The rising prospects of higher U.S. rates in 2017 coupled with a strengthening Dollar could be a recipe for disaster for Gold which is zero yielding. This metal is heavily pressured on the daily timeframe as there have been consistently lower lows and lower highs. Sellers may exploit the current technical bounce towards $1,155 to send Gold back low tower towards $1,115.

About the Author

Lukman Otunuga is an FXTM research analyst