Dollar woes continue as Merkel says euro is too weak

Last week was a bad one for the US dollar. Market participants questioned whether it was premature to assume a June rate rise was forthcoming and that the path of future interest rate rises would be the same as those as set out by the FOMC's projections.

Last week was a bad one for the US dollar. Market participants questioned whether it was premature to assume a June rate rise was forthcoming and that the path of future interest rate rises would be the same as those as set out by the FOMC's projections. Doubts were initially raised by somewhat weaker US macroeconomic data of late, and rose further when James Bullard, President of St Louis Federal Reserve, said the Fed's projections about interest rate hikes might be "overly aggressive." In addition, the dollar was undermined by political turmoil in Washington which cast doubt over Trump’s planned pro-growth policies. Investors also wondered whether interest rates outside of the US would remain extremely low for too long. In the UK and Eurozone, for example, inflation has been rising somewhat more rapidly than anticipated in recent times. This has made it increasingly difficult for the Bank of England and the European Central Bank to justify keeping their respective monetary policy stances extraordinary accommodative. Last week’s reports that the ECB was debating on its communication strategy about the future path of interest rates in the Eurozone was seen as a precursor for a potential early reduction of QE.  Elsewhere, the Canadian dollar gained ground as crude oil prices recovered after Russia and Saudi announced their intentions to support an extension to the oil output deal. As a result, the pound, euro and the Canadian dollar were among the currencies that gained ground versus the US dollar, while the US/JPY fell along with riskier assets in mid-week.

Merkel increases pressure on ECB

At the start of this week, the US dollar initially rose against currencies that had performed well last week as traders banked some profit. However, the gains could not last long, especially against the euro. The EUR/USD surged past 1.12 handle to a new yearly high. The latest rally was in response to comments made by German Chancellor Angela Merkel about the euro. She said the common currency is "too weak" and blamed the ECB for the record German trade surplus. So, the pressure is increasing on Mario Draghi and co. to tighten monetary policy and speculators are evidently front-running the ECB buy buying the euro. Indeed, the latest commitment of traders report from the CFTC revealed a sharp increase in net long positions in the euro last week.  

Looking forward to the week: Eurozone PMIs, BOC and FOMC minutes

While there is no significant data scheduled for today to potentially change the course of the euro, there will be plenty of PMI figures from the Eurozone to look forward to on Tuesday. In the US, we have a couple of speeches from FOMC members on the same day. The ECB President Mario Draghi will be speaking in Madrid on financial stability on Wednesday, the same day as when the Bank of Canada makes its rate decision and the minutes from the last FOMC meeting are released. In the latter parts of the week, we will have the eagerly-awaited OPEC meeting on Thursday and Friday will see the release of US GDP (second estimate).

Whether or not the above fundamental events will be able to help change the course of the dollar remains to be seen. But for now at least, the dollar is falling. Consequently, the Dollar Index (DXY) may further extend its decline towards the bottom of its previous range. In the short-term, some levels of potential support to watch include 96.90m 96.45 (61.8% Fibonacci retracement) and 95.88 – the low hit in November prior to the rally above 100 which ultimately failed to sustained itself. At this stage, a break in market structure is needed for DXY to turn bullish. So, watch old supports at 97.40 and 98.50 closely, for a potential move above these levels could spark some short covering in the dollar.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.