Dollar Recovers by Default

Market still sees rate hike as likely

The dollar recovered a little from its recent funk yesterday as traders ran out of reasons to continue selling. President Trump is still away on his first overseas trip and his rhetoric has been conspicuous by its absence.

This has allowed the market to concentrate on fundamentals and the positive view of the economy and the Fed. as being the most proactive of G7 Central Banks remains.

The dollar index which measures the performance of the greenback against the currencies of six of its major trading partners climbed by 0.75% from its post-election low posted on Monday.

The next FOMC meeting will take place on June 13/14 and although the market is not wholly convinced that there will be a hike (interest rate markets are pricing in a 60% probability) it is reasonable to believe it will happen.

Fundamentally the dollar remains potentially the strongest of the major currencies based upon economic performance. The Eurozone still struggles with pockets of high unemployment and low growth, The U.K. is mired in Brexit and Japan has its own unique intrinsic issues with growth and deflation. Therefore, traders are prepared to disregard, to a certain extent, Trump’s current problems.

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Euro running out of steam

With no new buyers and a lack of fresh positive factors, the Euro is performing in the opposite manner to the dollar. It is perverse to suggest it but since buying interest becomes exhausted, sellers emerge to drive a correction.

The underlying fundamental reasons for recent Euro strength remain but the ECB is a less proactive body than the Fed, so it will rise and fall based on perception rather than any official assistance.

Yesterday the single currency pulled back from its high against the dollar of 1.1264, its highest level since September. At that time, it made successive attempts to break higher but failed, precipitating the fall to a low of 1.0340. Any correction won’t be as steep, given the disappearance of political concerns but unless the ECB is able to provide support, any further gains will have to wait.

It was a similar story for the Euro against the pound. The rise in the single currency since May 10 where it made a low of 0.8383 had been almost one-way. A correction from the high of 0.8677 seen on Monday was inevitable and the current rate of 0.8610 reflects basic market activity.

Sterling adopts reflective pose

The horrendous events in Manchester on Monday night have led to the suspension of the General Election campaign and, to a certain extent, to a reflective phase for Sterling where it becomes reactive to other currencies drivers. Since both the dollar and Euro have entered similar phases, a calmer period is likely.

Following last week’s deluge of economic data, the market is being given an opportunity, which it is grabbing with both hands, to consider longer term factors as they come into play in the FX market. Central banks are playing a key role (as they always do) in shaping market sentiment but for now “wait and see” has become the watchword.

Next week is a shortened week with the Spring Bank Holiday on Monday. The data calendar is light until Friday when the U.S. employment report will be released.

Before that, unless there is a “black swan” event the corrective phase is likely to continue as even technical factors remain centred with little in the way of influence over trader’s position taking. Since technical analysis is a reflection of price action, it is wholly reasonable to see a lull as we enter a corrective phase.