Dollar bulls regain momentum

After unexpected USD weakness on Monday allowed commodities and metals an opportunity to recover some recent heavy losses, the USD regained its momentum on Tuesday. The USD moved higher throughout European trading, but rallied more aggressively during the US session when monthly Construction Spending was announced at 1.1%, nearly double the 0.6% expectations. Not only was the figure itself impressive but it alleviated concerns that US economic momentum might tail away during the final quarter of the year. There has also been speculation that Goldman Sachs may raise its US Q4 GDP estimate from 2.5% to 2.6% following the stronger than expected data.

The reinvigorated USD weighed on currency trading specifically, while also renewing pressure on metals and commodities. Gold dropped $10 and found support at $1190, while Silver fell to $16.05. Bearish momentum in the commodity markets also resumed, with Crude Oil losing nearly $3 and declining to $66.67 and Brent Oil declining by just over $2 to fall to $70.38. As long as this afternoon’s ADP employment change data and ISM Non-Manufacturing Composite continues to suggest that the US economic outlook is improving, it’s highly likely both metals and commodities will remain under pressure on Wednesday.

The EURUSD extended below 1.24 (1.2376) for the first time in nearly two weeks. As has been the case for the previous week, the pair traded narrowly during the European session with investors remaining uncertain what the outcome of Thursday’s European Central Bank (ECB) meeting will be. With the highly anticipated meeting being now just over 24 hours away and the threat of further stimulus continuing to attract headlines, I would expect investors to remain risk adverse today. The morning data sees confirmation of Eurozone Services PMIs for November and if this follows the same pattern of Monday’s Manufacturing PMIs, which were unexpectedly revised down, the pair could find support at its current yearly low of 1.2358.

The GBPUSD continues to follow the same pattern that has been the case for the past couple of weeks, where the primary reason for upside gains has been USD weakness. Attraction to the pair softened on Tuesday, when the UK Construction PMI for November dropped below 60 for the first time since October 2013. The lower-than-expected Construction PMI also heightened concerns that UK domestic growth is slowing down, with the stronger dollar inspiring more downside movement and leading to the GBPUSD concluding trading at 1.5631.

Volatility in the GBPUSD is expected to continue on Wednesday, with the UK Services PMI being followed by the UK Chancellor’s Autumn Statement. The UK economy is highly reliant upon the services sector, with services reportedly representing over two thirds of GDP. The current expectations for the PMI is 56.5, but any further signs of the UK economy slowing down would likely inspire bearish movement in the Cable today. The Autumn Statement also represents a risk to the Cable, due to it being reported that Chancellor George Osborne will announce the UK is falling behind in reducing government debt. Although the focus of the Autumn Statement will likely be on government debt, investors will be keeping a close watch in case Osborne provides further insight into monetary policy regarding UK interest rates and inflation levels.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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