In an interview with FXStreet, we discussed the stakes of a rate hike in the US, oil prices, the “hated” equity rally and more.
You can read the article in its original publication or here below:
Which timeline will the Fed follow on their interest rate hike quest??
Contrary to some hawkish statements by some Fed members, I do not see the Fed raising rates before December. A rate hike before the elections could draw criticism from both political camps. Also, the data is not strong enough to support it. A hike in December is possible assuming growth genuinely picks up in the second half of the year, with more steady job gains continue. In 2017 and 2018, the turtle-like pace of hikes could continue, but data could twist and turn many times until then, and the new administration in Washington will also have its say.
How does US Election affect that decision?
The Federal Reserve is not likely to raise rates before Americans go to the polls on November 8th. A hike would draw criticism from Trump, which supports low rates. It would also draw criticism from the Clinton camp, as a move that could weaken the economy and lower the chances for the incumbent party. The “lame-duck” session encompassing the two months before the elections and the inauguration could be a good time to sneak a hike, assuming the economy is strong. For markets and the Fed, Clinton represents continuation, enabling the Fed to continue what it is doing or not doing also in 2017. Trump hs made quite a few contradictory statements, and therefore it would be hard to see any action coming from Yellen and her colleagues until the dust settles.
What are the key levels to watch for GBPUSD bears?
GBP/USD bears have been hit by positive data this week. Nevertheless, in the case of worsening data and/or a return of “risk-off, there is room to the downside. 1.3060 is a small cushion ahead of the very round 1.30 level. Below, the “Leadsom line” of 1.2840 serves as a strong support. This is the low point the pair had reached before the Conservative contest was cleared with the withdrawal of Andrea Leadsom from the race. Further below, the post-Brexit low of 1.2798 is also a strong line. Below, we are already back to 1985 levels, with the round number of 1.25 providing a potential bottom.
Which safe-haven asset do you think has more potential to surge on more risk aversion: JPY or Gold?
It seems that gold has more room to run than the yen. The recent struggle with the 100 level in USD/JPY shows that the pair may be exhausted, or at least wary of intervention by the BOJ, something that hasn’t happened. On the other hand, gold prices have more room to run as speculation is rampant and traders have forgotten about the fall in prices after the 2011 peak. The risk-off sentiment might return in September and October, which are usually not very positive months.
Do you think equities have reached a top? Or is there more potential for indices to continue breaking highs?
It is hard to call a top on what is dubbed “the most hated rally” in equities. And, it also seems that central banks are watching stock markets closely and would not like to see a stock market crash. On the other hand, rises cannot last forever. I believe we will see some range trading, perhaps with insignificant new higher levels and that markets will become more nervous around the US elections.
Are the latest surges of Oil prices sustainable? Or will the crude market go back to bearish due to structural oversupply?
I see the latest rally in oil prices as short-lived. Production is up both in the US and among OPEC members. The US shale industry is quite flexible. When prices go up, the number of rigs follows and so does production. The oversupply then pushes prices lower and this results in less rigs and less production. This pendulum swing maintains a range. In addition, one of the drivers of the recent push comes from talk about some kind of OPEC production freeze or cut. We have already learned these expectations result in failures to agree on anything, so prices could come back down. While I do not expect WTI Crude Oil to drop below the lows seen early in the year, it seems the top is close.
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