Bullet Report: China-US Tensions halt the Dollar Rally

The week in FX is expected to start slow and probably remain so ahead of the Christmas holidays. Aside from the fact that there are no significant economic data to be released this week, markets always consolidate around this time as Holidays and end of year positions being readjusted create a muted tone in the markets. Last week the USD got a huge boost as the FED painted a very hawkish picture for 2017 and beyond. Particularly, the Fed now believes that 3 rate hikes are necessary in 2017 instead of 2 that were priced in. Other European Central Banks also stood pat, with Bank of England, the Swiss National Bank and Norway’s Central Bank keeping rates unchanged.

Currencies:After the surge of the Dollar last week which saw it make new records against many other currencies, Friday and today saw the Dollar weaken slightly as tension between China and Trump escalated a bit over the weekend over the capture of the US naval drone in Chinese waters. Overall, further USD strength cannot be excluded now that technical levels have been breached. Particularly, EURUSD broke out its long term support of 1.0465 and posted its lowest level since 2002 at 1.0365. The dollar was down 0.4% against its Japanese peer at 117.3, taking a breather after climbing to a 10-1/2-month high of 118.66 last week. In the week ahead, market players will be eyeing the release of Thursday’s final reading on U.S. third quarter gross domestic product for fresh indications on the strength of the economy and further hints on the future path of monetary policy.

Stocks: News over the China-US tension caused markets to turn red on Friday despite the fact that the FOMC painted a positive picture over the economic growth next year. Trump has previously threatened to declare China a currency manipulator and force changes in U.S.-Chinese trade policy, which he described as leading to the theft of American jobs. The Dow Jones industrial average .DJI ended down 0.04 percent to 19,843.41 on Friday, while the S&P 500 .SPX lost 0.18 percent to 2,258.07. Today, Asian shares slipped to four-week lows.

Oil and Gold: Oil prices started the week with gains as focus turned yet once again on the recently announced production cuts in crude oil. Oil rose 27 cents or 0.5% to $52.16 a barrel while Brent rose 0.3% to $55.54. OPEC at the end of November agreed to cut production by 1.2 million barrels a day starting next month, as a two-year-long overhang has depressed prices. The pact was followed by an agreement from 11 non-OPEC producers to cut their supplies by 558,000 barrels a day. GOLD prices edged higher to $1142 an ounce, extending their recovery from 10.5 month lows hit last week at $1,122 an ounce.

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