Dollar dominance punishes Euro Pound and JPY

The Dollar bulls are continuing to enjoy momentum and drive the Greenback higher following Janet Yellen reigniting buying interest after she recently repeated the Federal Reserve’s commitment to raising US interest rates at some point this year. There were previously concerns that with fragilities in the US economy being exposed, that the Federal Reserve would delay raising US interest rates until 2016. US economic data was mixed yesterday with another weak durable goods release increasing the likelihood that future GDP readings will continue drifting lower. While it is positive that business investment is on the rise, I remain concerned that the expenditure that we are seeing in the US economy is through investment and not traditional consumer spending.

The Euro is continuing to decline throughout the currency markets with the combination of a possible Greece default in just over one week and anti-austerity parties being declared victorious in several elections across Spain weighing steeply on investor sentiment. The anti-austerity election victories in Spain has alerted investors, because not only is there a general election taking place at the end of the year, but because it has put even more pressure on the negotiations taking place between Greece and its creditors. The possibility for an anti-austerity government to form in Spain is increasing, and if a deal between Greece and its creditors is secured this will mean that Greece will receive at least some flexibility with regards to its bailout conditions, and this may act as encouragement if a similar situation arises with Spain at a later date.

The blueprint for anti-austerity parties to become prominent figures in European governments is emerging, with this increasing the possibility of political risks throughout Europe. Investor sentiment has already been weighed down by the continual negotiations to avoid a Greece default, with attention soon to turn to UK Prime Minister David Cameron as he begins his own negotiations with EU leaders and a general election in Spain at the end of the year. With anti-austerity parties already winning local elections across Spain, the latter is going to weigh on investors and if the recent local elections are anything to go by, then there is potential for the situation with Greece to repeat itself. These are all seen as risks to investor sentiment and with the EU economic landscape remaining weak, this is exactly why I am still refusing to rule out the Eurodollar reaching parity by the end of the current year.

The GBPUSD has now dropped to 1.5353, with this largely being a technical move following the pair closing below 1.55 a few days ago. The pair is still vulnerable to further losses, especially with the USD riding high, and a reduced outflow of UK economic data meaning that the Dollar is providing direction for the Pound at present. Preliminary UK GDP figures are released on Thursday but unless this is an outstanding figure and offsets the Bank of England’s (BoE) constant concerns over weak inflation, it is unlikely this will awake the bulls because a UK interest rate rise is still around a year away at the earliest. There is some optimism that the BoE could hike rates during the first quarter of 2016 but this is extremely unlikely for as long as the BoE’s inflation concerns are so stubbornly strong.

Another technical move has been the conclusion of a bullish wedge pattern on the USDJPY, which has resulted in the pair touching a seven-year high at 123.309. Despite the recent Japanese GDP reading coming in higher than expected and further indications being noticed that the trade deficit is beginning to shrink, the markets continue to question the pace of the Japanese economic recovery with this resulting in bearish pressure on the JPY. Knowing that the Bank of Japan (BoJ) is highly unlikely to increase stimulus measures and with technical indicators now suggesting the USDJPY is heavily overbought, I can envisage traders beginning to close positions over the next few sessions.

Commodities
Gold has suffered as a result of Dollar strength and dropped to a two-week low at $1185.51. Other than Mortgage Applications, US economic data is low in volume today and this will likely release some of the recent pressure on Gold selling. This means that Gold will likely attempt to move up the charts slightly today, before being at risk to further declines later in the week if the US economic data reinforces expectations that the Federal Reserve will begin raising interest rates before the end of the year.

WTI Oil has also suffered from Dollar strength and is at risk to dropping below a one-month low at $57. The bulls are likely to attempt to push the price of WTI higher with US economic data being thin over the next day, with volatility increasing as the weekly US Crude Inventory report is released on Thursday afternoon. The markets will be looking for increased signs of a correlation in declining oil rigs and reduced trade surpluses, but I still think there will be hesitation towards purchasing with such an oversupply remaining in the markets.