USD rally not over yet
USD bulls were dealt a painful blow by the US Federal Reserve's FOMC statement with the US growth outlook revised down and concerns about low inflation voiced. Despite this, the divergence story between the US and the Eurozone and Japan remains intact.
The knee jerk reaction to lower growth estimates, a downgrade of likely interest rate levels going forward and concerns about low inflation from the Fed sent USD plummeting versus the EUR.
However, USD appears to be already recovering its poise – though a period of consolidation may occur before it resumes its up-trend. Practically the entire market has been long on USD for most of this year and a correction is over-due.
Meanwhile, the Fed dropped the word 'patient' from its communique, while emphasising that it is not impatient to raise interest rates. This change of wording is potentially bullish for USD.
EUR/USD – parity still on the cards
US economy remains better bet than Eurozone and Japan
Basically, the Fed said it will let economic data drive the decision on interest rates. This year the US is still likely to be the fastest growing economy in the G7, job creation continues at a steady pace and there are signs that the lower oil price is stimulating domestic consumption, which is far more important than exports to the US economy.
Geopolitical conditions permitting, oil prices could remain depressed for the rest of this year and eventually its deflationary effect will drop out of the inflation data. More consumption on the other hand should put a floor under falling prices.
Also, even if the Fed is slower to raise rates and by less than the market expects the US outlook still remains a lot more bullish than for Japan and the Eurozone. Both regions are carrying out quantitative easing programmes and pursuing aggressive devaluation policies. Meanwhile, their economies appear to have less capability to grow at the pace of the US one.
Fundamentals suggest that the USD rally still has some mileage in it versus the EUR and JPY.
By Justin Pugsley, Markets Analyst, MahiFX