US Dollar Finding Support

The US dollar is finding growing relief from the fact that the Fed is putting up a high hurdle before more quantitative easing (QE3) is even considered. As highlighted by Federal Reserve Chairman Bernanke last week he is not considering QE3 despite a spate of weak US data. Of course until US bond yields move higher the USD will fail to make much of a recovery and in turn this will need some improvement in US economic data.


The May retail sales release is unlikely to provide this with headline sales likely to undergo an autos related drop while core CPI released on Wednesday is set to remain benign in May. There will be better news on the US manufacturing front, with surveys and hard data likely to bounce back.

There is still plenty of scope for USD short covering as reflected in the fact that IMM USD positions fell further as of the 7th June, with the market still heavily short USDs. The USD index has likely found a short term bottom, with a break above the 50-day moving average level around 74.6874 in focus.

EUR has lost momentum , with the European Central Bank’s (ECB) confirmation of a July policy rate hike prompting a major sell off in the currency, even with interest rate markets barely flinching. The EUR is susceptible to developments regarding Greece and the news on this front is not good. Divisions between policy makers including the ECB about the extent of private sector involvement in a second bailout package threaten to prolong the pain.

Similarly divisions within the Greek parliament about further austerity measures needed to secure a second bail could also derail the process. Further negotiations this week will be closely scrutinised, likely taking more importance than data releases, with only the final reading of May inflation and industrial production of note this week.

As revealed by the CFTC IMM data, EUR long positions jumped early last week leaving plenty of scope for unwinding, something that is likely to take place this week. Nonetheless, support around the 30 May low of EUR/USD 1.4256 is likely to prove difficult to break on the downside this week.

GBP took a hit in the wake of yet more weak activity data in the form of May industrial and manufacturing production data. The economic news will be no better this week, with retail sales set to drop in May and CPI inflation set to rise further in April. The data will only add further to the confusion about UK monetary policy as the dichotomy between weak data and persistently high inflation continues.

Admittedly the weak data releases can at least partially be explained away by the Royal wedding and Easter holidays but this will provide little solace to GBP bulls. GBP will likely struggle against a firmer USD this week although its worth noting that GBP speculative position has been negative for 3-straight weeks, suggesting that at least there is less room for GBP position unwinding. GBP/USD is likely to hold above support around 1.6055 this week.

Advertisements

One Response to “US Dollar Finding Support”

  1. John Says:

    Hi Mitul,

    I have a few of quick questions:
    1. Is the US dollar index simply a real effective exchange rate?
    2. Re: UK inflation – CPI is currently around 4.5% and both RPI and RPIX are both above 5% but is this not largely due to the increase in VAT? If we strip this away (assuming the increase was fully passed onto consumers) isn’t inflation much closer to the BoE target? especially core measures. Given the backdrop of an economy flatlining, limited job creation and weak wage growth is there any real chance that the BoE will increase rates?

    Interesting read as ever.

    John


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: