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After Friday’s late dollar selling, the markets have allowed the dollar to breath. Will the dollar recover or has the fall stopped temporarily?

On Friday, Non Farm Payrolls were better than expected. "Only" 539K jobs were lost in April, contrary to early expectations that were at -615K and later improved to 590K.  

The good figure sparked some risk hungry responses – dollar selling. The strong response didn’t come immediately: there was an initial push upwards, but it was in normal levels.  If we take the EUR/USD, it rose from about 1.34 to 1.35 during the first minutes after the release, but then stopped to rest.

The bigger push upwards came only at around 16:00 GMT, more than 3 hours after the announcement. EUR/USD made the big break and reached 1.3650. That happened only at the last minutes of the forex trading week.

The new week began with a continued trend of dollar selling, but reversed quite quickly. It seems that there was some serious profit taking. EUR/USD fell back to 1.3575 (at the time of writing.

The same trend happens with GBP/USD and USD/CHF – the dollar took a dive on Friday and is now retracting. Only USD/JPY is going against the trend, with the dollar currently weakening. The famous Dollar Yen correlation is felt strongly.

Where will the dollar go?

This depends on the data. Here are a few scenarios:

  • Weak US data: Bad figures from the US will probably lead ot risk aversion – thus sending traders to the dollar. This scenario is unlikely, since figures also have a trend – they are getting better and better lately.
  • Good US figures lead to more risk appetite: We’ve seen good US figures lately, and we’ll probably see some more positive data. If we follow the Non-Farm Payrolls figures, we’ll see increased appetite, thus seeing the strengthening of Euro, Pound and Swiss Franc, and a weakening of the safe haven currency – the greenback. There’s a good chance that this will happen later this week.
  • Good US figures lead to Dollar strength: The risk factor isn’t here forever, and wasn’t always here. Remember the days when good news for the dollar meant gains in the currency? A nice streak of positive figures from the US could well lead to the fade of the risk factor, and the rise of the dollar. While this probably won’t happen this week, it’s just a matter of time till the recovery will be firm, and the risk factor will disappear.

The next major figure from the US is tomorrow’s  Trade Balance. Afterwards, Wednesday brings the  Retail Sales, which is a huge economic indicator. For more about this week’s events, check out the Forex Weekly Outlook.

Where do you think that the dollar will go to?

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