Dollar bulls in control

May 31, 2016

Dollar bulls remained in control early Tuesday as last week’s comments by Janet Yellen suggesting that a rate hike this summer is on the table continued to echo in markets. The dollar index traded near two-month high as traders continued to adjust their bets on when the Fed could raise rates. Markets are currently pricing 30% probability for June rate increase and slightly higher than 60% for July, indicating that a summer rate hike is partially priced in. These expectations will continue to be the major driver for the U.S. currency on the short-run and traders are awaiting anxiously Fridays labor report to adjust their outlook. However, todays Fed's favorite gauge of inflation PCE price index release shouldn’t be ignored, since it’s the only major inflation report to be released prior to next monetary policy meeting. Personal income and consumption data are also on the calendar, and all what it needs is another surprise to the upside to drive the greenback higher from current levels.

The Aussie outperformed its major peers as net exports and building approvals blew economists’ expectations. AUDUSD rallied 0.9% as upbeat data likely to provide a wait and see approach by RBA suggesting that June or July rate cut will be put on hold. Meanwhile, tomorrow’s GDP figures will provide a better picture on how much exports contributed to the economy’s growth. Bond yields rallied across the curve with 2-years adding 3 basis points to trade at 1.7% making it more attractive for investors searching for yields in developed economies.

The Euro is headed to post its worst monthly performance since November against the U.S. currency dropping by almost 2.9%. EURUSD broke below 1.11 for the first time since mid-March on Monday before recovering slightly higher. German retail sales plunged 0.9% in April, marking the second consecutive monthly decline versus expectations of 0.9% increase. Slowing consumer momentum in Germany did little to move the Euro as traders are more concerned about May’s flash CPI report due at 9:00 GMT, which is likely to show the Eurozone remained in deflation for the fourth straight month. However, the single currency is likely to continue trading range bound until ECB meets on Thursday.

Gold recovered slightly after falling to a three-and-a-half-month low on Monday breaking below $1,200. The yellow metal’s inverse correlation with the U.S. currency seems to remain on hold as risk appetite along with U.S. dollar strength creates the best situation to be short on the safe haven metal. Next target on the downside is the 50% Fibonacci retracement from 2015 December lows to May highs at $1,175.  

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