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Investors punish the US Dollar as economy shows signs of stalling

Posted on May 19, 2015 05:37

05/18/2015 - 14:30

The US Dollar is looking weaker as the weeks roll by and economic data from the world's largest economy continues to be weak. There is no doubt that the US economy contracted in the first quarter, going by the recent weak data posted. There is no doubt that a June rate hike is definitely off the table, unless we get to see a miraculous turnaround for May and June, and that includes a stronger jobs report (similar to what we saw during the first quarter of this year) and an overall pickup in retail sales and more importantly inflation. But this scenario looks a bit farfetched and in the longer perspective, the current decline in the Greenback could possibly be attributed to the markets pricing in no rate cut in June.

Of course, the puzzle still remains because if June rate hike is off the table, there is a possibility for July or even August as the next potential candidates. As the Fed perhaps made it very clear, interest rate hikes are data dependent, for now the markets would very well be looking into July/August/September timeframes as the next potential candidates for a Federal Reserve rate hike.

It is quite clear that the investors are a bit confused, going by the April jobs report released earlier this month. Although the numbers barely managed to beat estimates along with the unemployment rate ticking lower, investors were still unsure. Until a few months ago (before the March disappointment), the NFP was perhaps the biggest market moving event from the US which was one of the reasons for investors load up on their USD long positions, but that looks like a bit of history in recent times.

Looking at the currency pairs on a monthly basis, we do notice that within this time frame, most of the currencies should be able to complete their corrections to the longer term downtrends.

The chart below shows the EURUSD monthly charts, which as we pointed out earlier has seen a strong turnaround after hitting lows of 1.0682. To the upside, resistance comes between 1.179 through 1.197 and this is something that could be achieved within a month or two.

EURUSD – Monthly Charts, May 2015

The GBPUSD chart is now just a few pips away from reaching its target towards 1.59 – 1.60 levels. Although the Pound Sterling, comes in at second place in regards to interest rates. The BoE in its recent inflation report hearing has poured cold water on rate hikes as the Bank expects inflation to return to 2% target somewhere in 2016. This pushes the first rate hike from the BoE towards the second or third quarter in 2016 and in comparison to the US Dollar this might be weak for the Pound Sterling (that is, assuming the US Federal Reserve will indeed hike rates this year). However, against other currencies, the Pound Sterling certainly sits in a good position especially against the Euro and the Yen. With the election risks now a thing of the past, there is only the uncertainty of the ‘Brexit’ in-out mandate. But by and large, the consensus remains that the status quo would be maintained.

GBPUSD – Weekly Chart, 18/05

The USDJPY currency pair has little changed on the weekly charts and continues to be range bound within 121.52 and 117.05 levels. We could possibly expect to see a dip to 117.058 before the currency can push higher and eventually break the longer term resistance 1223.17, something which looks possible within a month of two.

USDJPY – Weekly Chart, 18/05

There are no major events from the US this coming week with the exception of the FOMC meeting minutes and monthly CPI numbers. Consensus is tipped to the downside with the headline CPI expected to fall to 0.1% and the Core CPI remaining unchanged at 0.2%. The FOMC meeting minutes could bring some volatility to the markets but by and large, it would be a tough call to expect a shift in sentiment in the US with just the Fed’s meeting minutes report (and that too for just one month). In this aspect, the minutes could offer a bit of fodder for the doves which could continue to keep the US dollar under pressure. After all, the Fed did, at some point in the previous meetings mention about the appreciation of the US Dollar. Back then the US Dollar Index was trading near the levels of 98 – 100, as compared to Friday’s close at 93.20.

All in all, the months of May/June will be quite interesting for the currency markets especially once the corrections to the major resistance levels are done with for the most part, which brings to question that we could after all see a rate hike from the Fed later in the year.

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Monday, 25 May, 2015 / 3:52

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