Big Dollar rebounds this week as markets look past soft

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Heading into the weekend the Greenback has found legs as currency markets look past last week’s extremely disappointing Non-Farm Payroll result and Federal Reserve (Fed) minutes that indicated growing reservations about interest rate hikes.

Data from last Friday showed that only 126k jobs were added in to the world’s largest economy in March, drastically less than the 245k forecast. Meanwhile this week the Fed minutes revealed disharmony in committee that sets monetary policy in the United States. With some members suggesting that economic data won’t likely justify a rate hike until 2016.

However despite the soft employment data and rate hike uncertainty the Big Dollar has been bid higher this week, markets seemingly focused on the ‘big picture’. In which the relative strength of the American economy still lends itself to a stronger Dollar. This has caused EURUSD to give back over 3% this week, the pair slipping from near 1.10 back towards 12-year lows. Given ongoing Greek debt repayment concerns and dovish European monetary policy, the future looks to hold further declines. Congestion between 1.0500 and the mid-1.04 area offers key support, should it fail, parity comes into play.

Sterling has felt a bit of pressure this week as election related uncertainty weighs on the British unit. Recent polls suggest that the incumbent Conservative government and their traditional Labour Party rivals remain locked in a neck-and-neck race to form the backbone of a coalition government. The uncertainty has pushed the interbank sport rate for GBPUSD down to fresh 4-year lows in the low-1.46 handle as the week draws to a close. The next major support is at 1.45, a historical level from June 2010.

The data calendar is busy next week, with lots of fundamental data slated for publication. However the most highly anticipated events and thus the events most likely to trigger FX rate volatility will be British and American Consumer Price Index (CPI) results on Tuesday and Friday respectively. Additionally, Wednesday’s European Central Bank (ECB) monetary policy announcement could see wide swings in price action.

Inflation, the favored measure of which is CPI, has been sluggish in both the United States as well as the Britain in recent months, driven largely by declining oil prices. This has resulted in delays to long anticipated interest rate hikes for both nations. In both countries, economic output has been growing and labor markets have broadly stabilized following the global financial crisis. Healthy and sustainable inflation is the last piece of the puzzle required to fall into place before central bankers in the US and UK can look to normalize monetary policy.

Expectations are for a repeat of last month’s flat reading on Tuesday for Britain. After months of declines annual prices growth dropped to zero last month, suggesting that the UK is on the verge of deflation. A reading next week that confirms this view will likely be received negatively and prove a further setback for the struggling Sterling.

Friday’s American inflation number is expected to yield +0.2% year-over-year, matching last month’s result and up markedly from multi-year lows of -0.7% in January. The relativity healthier inflation in the US versus the UK plays a large part in the expectation that the Federal Reserve will hike interest rates ahead of the Bank of England. However despite the relative advantage a +0.2% result is still well below expectations and generally considered fairly weak. It is easy to imagine the Greenback coming under pressure on Friday in the actual result misses forecasts; especially in light of the disappointing Non-Farm Payroll data last week.

While the ECB is not expected to announce any change in policy next Wednesday, markets will dissect every syllable of the press conference. In particular guidance on the observed effectiveness of QE and insights on the continuing Greek debt saga are likely to draw interest and thus result in elevated rate volatility. ECB president Mario Draghi has previously indicated that QE has helped to loosen money markets. A trend that has continued in recent weeks as yields in Eurozone member countries plummet. In fact short term yields in Germany, France, the Netherlands, Belgium Austria, Ireland and recently Spain dipped into negative territory, thereby encouraging spending. Should Draghi sound especially optimistic about QE, the Euro could find itself bid higher.

In this week’s podcast, we  discuss: USDown or greenback comeback? And also touch other topics:

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About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

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