Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Profile

Yellen revives USD rally – but scope for big gains limited

The USD looks like it's returning to top form as it notched up its highest levels versus JPY since 2007 and is clawing back losses versus EUR and GBP. However, a repeat of big USD gains looks unlikely.

On USD/JPY key resistance at 122.04 was effortlessly swept aside and on EUR/USD successive support levels have been breached though the market is still some distance from key support at 1.0470. Ditto for GBP/USD with a key low residing at 1.4566.

Yellen revives USD rally – but scope for big gains limited

On USD/JPY key resistance at 122.04 was effortlessly swept aside and on EUR/USD successive support levels have been breached though the market is still some distance from key support at 1.0470. Ditto for GBP/USD with a key low residing at 1.4566.

However, USD rally is also in large part down to what's happening elsewhere. The honeymoon period for GBP following the Conservative party's surprise election victory appears to be fading. Japan remains committed to a massive quantitative easing programme. Meanwhile, the Eurozone also has one with added concerns over Greece's debts and now signs that Spanish voters are rebelling against austerity.

For Greece June 5 is an important deadline as it's due to make a payment to the IMF. Missing it could cause major financial ructions. Therefore a compromise – probably involving kicking the can down the road – is likely to be found. A solution should give EUR some temporary positive impetus, before the market starts worrying about the next Greek debt repayment deadline.

 

USD/JPY – We Have Lift-Off

 

Rate rise could end USD rally

Another factor is that the Fed will be concerned if USD goes into another period of extended rallying and will likely try to hold it down.

Ironically, the best way to do that might be to actually raise US interest rates by a quarter point. History has shown that USD rallies tend to lose their puff once anticipated rate rises start happening. A rise accompanied by a dovish statement over further rises would probably see the current USD rally falter.

The Fed is probably hesitating as it knows that the first rate rise since June 2006 will be a historic event. It's probably also concerned about potential chaos in financial markets as a result. However, it's one of the most well flagged rate rises in history. When it eventually happens it may not be that chaotic.

Though the US recovery has not been as dynamic as on previous occasions, the US still looks in better shape than the Eurozone and Japan, both of which are still trying to free themselves from economic stagnation.

The impetus for a continued USD rally may therefore be more dependent on bad news elsewhere highlighting the US as a safe haven. Nonetheless the scope for more big gains looks limited at the moment.

 

By Justin Pugsley, Markets Analyst, MahiFX

Follow @MahiFX on twitter

comments powered by Disqus

Trader Stories

Latest Interviews

Statement on CHF market volatility

Business as usual for MahiFX despite Swiss franc movement

Full Interview

MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such. Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. MahiFX’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.