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Sluggish economic growth prevents dollar demand

Posted on May 6, 2015 06:07

Weekly Outlook - 4th May 2015
Written by easy-forex team


Only a few weeks ago the entire forex market community was in agreement that the EUR/USD was in immense downwards pressure and most market bulls were cutting their losses short, while others were feeling comfortable to open several trading positions to sell the world’s most popular currency pair. Given that many traders were even anticipating the EUR/USD to reach parity, it is quite surprising to observe that the rate not only stopped heading towards parity, but it even posted some noteworthy gains following the Federal Open Market Committee (FOMC) statement last Wednesday.

While the content of the FOMC statement was not clearly pointing to any specific action plan, there were some remarks that projected the policymakers’ worries on the recent slowdown of the U.S. economy’s growth given that the inflation rate has not reached the 2% target. The Committee however clearly stated that its future decision on whether to increase interest rates will highly depend on the performance of the labour market and also the inflation level. Even after the U.S. dollar’s recent lack of strength, some are still forecasting that a possible interest rate increase could take place during this year’s third quarter. But the Federal Reserve moved to warn those market participants that any further lack of economic recovery could permit the maintenance of the interest rate to its current levels. It feels like the influence of global economic dynamics is preventing any solid and steady recovery of the U.S. economy and in turn there could be further lack of demand for the dollar in case the Fed makes some clear intentions to postpone an interest rate hike to a later stage than the one anticipated. The EUR/USD posted gains on all of last week’s trading days but the most noteworthy of them was Wednesday where the currency pair’s rate increased by 1.3% on the back of the FOMC statement. On Tuesday and Thursday the EUR/USD also moved upwards by 0.8% and 0.9% respectively and helped the currency pair to close the trading week with overall gains of 2.97%.

Similar to the U.S., the Japanese economy is also failing to show solid signs of growth following its latest piece of weak financial data. The Retail Trade report released last Monday by the Japanese Ministry of Economy, Trade, and Industry for March showed that there was a decline of 9.7% during the last twelve months in relation to the previous month’s decline of 1.8%. The already weak report surprised the markets who were already prepared for a negative number but analysts forecasted that decline to be only 7.3%. The Japanese market is not moving towards the levels of growth which the Bank of Japan (BOJ) would feel comfortable with, but instead there could be upcoming pressure to apply additional monetary easing in case of further signs of weakness. The USD/JPY reacted with gains throughout large parts of last week and increased by 1.03% on a weekly basis to reach 120.133.

The British pound could be an interesting one to follow this week as the nation moves closer to its general elections on Thursday 7 May. The latest polls keep reaffirming the markets that no political party has a clear advantage and so this makes the GBP/USD rather volatile. Is this the end of the currency pair’s uptrend?

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Monday, 25 May, 2015 / 12:00

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