Never bet against all the doubters who say the mighty dollar is down and out? (Or even many esteemed Wall Street analysts who forecast the greenback would sink all year due to structural issues and deficits). The world’s reserve currency is heading for its best week in nearly nine months after the surprise change in tone from the Federal Reserve on Wednesday continues to rattle markets and fundamental positioning.
A market accustomed to liquidity on tap from a “patient” Fed has had to face the reality that a tightening is coming far sooner than it previously thought. Short positions in the dollar are being furiously unwound with broad measures of the trade-weighted dollar rallying around 1.5% this week, rising over 1.6% versus the euro and a bigger than 2% versus AUD. There is now an end point to zero rates, tapering discussions have commenced and position adjustment is now taking place in full effect!
EUR/USD dips below 1.19
The world’s most traded currency pair has tanked another big figure from 1.21 to 1.20 to below 1.19 this morning. Support zones have been smashed with the trade-weighted dollar kissing 92 in its widely-watched index.
Given that it is heavily weighted towards the European low yielding currencies, the short-term bull trend may have more legs to it. With a quiet calendar for today, current sentiment and momentum to wrap up this tumultuous week will be instrumental in where we close.
The ECB will be happy to distance itself from the Fed with its currency falling and so keeping financing conditions loose through the summer. With a Fib level around 1.1950 (38.2% of this year’s high to low move) taken out yesterday, the next support level comes in around the psychological 1.19 mark before 1.1835.
GBP suffering today
Just released UK retail sales figures for May disappointed with a reading of -1.4% versus the expected +1.5%. However, the decline marks only a modest correction after the surge in the previous month when shops reopened their doors. Analysts predict that rising confidence and pent-up savings should help retailers over the summer, especially if overseas holiday trips are curtailed.
GBP has been a relative outperformer this week, at least compared to the commodity currencies, but ongoing Brexit issues may cast a shadow over sterling going forward with the risk of protocols being triggered and possibly even tariffs being threatened as the war of words between London and Brussels intensifies. Cable has dropped through the long-term trendline and is also now trading below the 100-day SMA. Loss of support in the low 1.39 area is targeting a move down to 1.3800/10.