Is the USD rally over?
Markets are all about discounting the future. With USD the quantitative easing taper story is long gone and the markets have been anticipating a US interest rate rise for nearly two years now.
If history is anything to go by, USD tends to rally hard in anticipation of the interest rate cycle turning upwards and then moderates considerably once the actual rate rises take place. The Fed is expected to raise US interest rates this year, possibly during the summer.
That suggests that the USD rally may not have much further to run – though it probably isn't over just yet.
On the other side of the trade there are events driving the other major currencies. For EUR and JPY, both central banks are engaged in quantitative easing, which will maintain downward pressure on both currencies. In other words lots of new EURs and JPYs are being created, a process, which the US is no longer engaged in.
EUR/USD – probably near the bottom
European recovery could change EUR/USD dynamics
However, there are signs that an economic recovery might be starting to take shape in Europe and Japan actually recorded a trade surplus though the picture for the domestic economy remains mixed. This may help attract foreign exchange inflows into both countries, which would be supportive for EUR and JPY.
It would therefore be too soon to call time on the USD rally and by some measures this currency is already expensive relative to others.
For the moment EURUSD is in a consolidation pattern of 1.0470-1.1050. A breach below parity is still possible given the European Central Bank's QE programme, but to be convinced that parity will at least be hit, a break below 1.0400 would be needed to give that move conviction.
That will require some form of catalyst as the coming US interest rate rise and the ECB's QE programme all appear to be priced in by the market. However, if parity is reached, given the history of USD rallies, it's unlikely to last long – the pair are eventually likely to return to levels of 1.1000-1.2000.
By Justin Pugsley, Markets Analyst MahiFX