USD might just be poised for a period of prolonged weakness
Last week Federal Reserve boss Janet Yellen further knocked the wind out of the USD’s sails following her dovish remarks on US interest rates, which may spell a period of weakness for the Greenback.
The operative word is ‘may’ as there’s still plenty of potential for bad news to upset the apple cart and besides the Bank of Japan and the European Central Bank continue to pursue aggressive monetary policies. In essence, there’s still a strong case for monetary ‘divergence’ between the US and most of the rest – it’s just that it’s less extreme with the Fed rowing back on the pace of rate rises. Though that divergence is still there and should remain an underlying support for USD.
At the same time there are ongoing concerns over whether the UK will vote to leave the EU on June 23, which could have repercussions on the strength of the recently more resilient EUR and could spell further losses for GBP. That could bring USD to the forefront as a safe haven.
Nonetheless, USD has been hovering around five-month lows on the Fed’s much more cautious and dovish stance over raising US interest rates.
But there’s another factor, which could lead to sustained USD weakness over the next couple of months. It’s just possible that the US economy might be emerging from its recent sluggish patch.
The March Non-Farm Payrolls number coming in at 215,000 versus 245,000 previously along with hourly earnings up 0.3% versus -0.1% last time and was broadly positive even though the unemployment rate to 5.0% from 4.9%. Also, on the plus side of the ledger was the Supply Management reading on US manufacturing at 51.8 in March, an improvement on 49.5 seen in February. Other positive news saw pending home sales rise by 3.5% and consumer confidence up at 96.2 in March against an upwardly revised 94.0 in February.
The prospect of the US economy picking up steam again coupled with Yellen’s cautious stance on monetary policy could usher in a temporary sweet spot for risk currencies reflecting USD weakness as investors once again indulge their risk appetites. Even carry trades could make a comeback and in that environment and JPY could also go through a prolonged period of weakness.
Next week should provide further evidence as to whether the US economy is picking up steam again. On Monday April 4, sees the release of US factory orders, Tuesday April 5, it’s ISM Non-Manufacturing PMI, Wednesday April 6, US crude oil inventories are published and more importantly there’s the release of the Fed’s FOMC minutes, which should cast a further insight into Fed thinking on the economy and interest rates. On Thursday April 7, Yellen speaks and traders will be looking to see if she is maintaining her cautious stance on monetary policy.
However, if the US economy is gathering momentum it won’t be long before market participants start speculating over a quicker pace of US monetary tightening, which could send USD back up.
But until then it could very much be a case of risk-on trades continuing to be the flavour of the day at the expense of USD.
TECHNICAL ANALYSIS: EUR/USD move starting to look over-extended
The EUR made some fine progress against USD last week – a 2% gain roughly and its best in about a month.
Nonetheless, such sharp moves tend not to be sustained for long. Indeed, EUR/USD is just beginning to look over-stretched, though it could still go a little higher. The parabolic stop and reverse indicator is still showing an up-move. However, the pair are poking through the upper Bollinger band, often a contrarian signal, and the daily RSI is just starting to flirt with overbought territory.
Though the pair might be close to staging a reversal, it doesn’t necessarily signal an end to the EUR/USD upward move. Very likely it will be a period of consolidation – unless the mood of the markets suddenly darkens again.
On the upside, resistance can be seen at 1.1437, 1.1473-6 and 1.1495. It would take a considerable dose of bearish USD news to push the pair up to the next big resistance level of 1,1622 in a short time.
However, if a period of consolidation does start to materialise next week, support should be found around: 1.1309, 1.1294, 1.1183-7 and 1.1165.
By Justin Pugsley, Markets Analyst, MahiFX