Growing USD Appetite Weighs On The Euro And Commodities

The USD is continuing to pick up momentum and appears set to record its strongest two-day rally against its major trading partners since the FOMC statement two weeks ago. There are a few different reasons why investor appetite towards the USD is returning, and while one of these is likely to be the robust GDP data last Friday once again illustrating that the US economy is progressing, the major contributor behind the driving USD demand remains the clear divergence in economic and monetary sentiment between the United States and many other economies.

While there is likely to be impatience shown by traders in the months ahead due to the hesitancy from the Federal Reserve to begin raising US interest rates, the Fed will still be able to begin the next stage in normalising monetary policy before the overwhelming majority of other central banks can even contemplate the idea. For this reason, the USD is going to remain attractive towards investors and I envisage traders continuing to return to the dollar no matter how impatient they become with the Federal Reserve.

Looking ahead, the market reaction to this Friday’s NFP is going to be an extremely interesting one to watch. In fact, the jobs’ report has the potential to create huge movements in what has already become a turbulent time for the currency markets. Job creation has been the major driver behind the US economic recovery and the consistently impressive NFP reports have also been a major underlying reason behind the USD reaching milestone highs. While the FOMC statement made no secret that it will not be rushed into raising interest rates - it didn’t completely rule out a rate hike in June, and another impressive employment showing this Friday could inspire traders to rush to the USD once again.

At the same time, the FOMC are making it clear that they will not be pressured into raising interest rates as early as the USD bulls would prefer, and if this NFP report provides room for more hesitation from the FOMC – the recent USD profit-taking could really intensify to new levels. Overall, I think that the reaction to the NFP this Friday could really set the theme for the next quarter in the currency markets. Some are repeatedly talking about the possibility of a USD correction, and while I doubt this is going to occur anytime soon a weak NFP could push interest rate expectations further back and encourage the possibility of a correction.

Meanwhile, the EUR/USD has declined by over 100 pips to 1.0713 after the markets received a reminder exactly why the European Central Bank (ECB) launched QE. Core inflation within the Eurozone came in weaker than expected during March at an annualised 0.6% and this has dealt a blow to the steady optimism that was growing over slightly improved economic data. As far as I am concerned, the ECB unleashing QE basically signals a new era of currency weakness for a central bank that is no stranger to loosening monetary policy and it would require some incredibly dramatic USD weakness for the Euro to strengthen. Economic sentiment within Europe remains at extremely low levels and upside gains for the EUR/USD are in many ways limited to USD weakness.

As mentioned above, there has been some renewed confidence that economic fortunes within Europe might be improving after slightly improved data. This might sound harsh, but nobody should be getting ahead of themselves over this. The factors behind the ECB throwing so many stimulus tools out of its toolbox in recent times has been because of inflation and economic growth concerns, and these still loom large. Additionally, there is nothing to show that the improved data has not been led by the weaker euro and company budgets being eased by the decline in the price of oil – rather than stimulus measures having the desired impact.

The Aussie has been a major sufferer throughout the past week with the AUD/USD tumbling down rather close to its near six-year low at 0.7559. The primary reason behind the pair dropping over 300 pips over the past week has been due to increased bets that the Reserve Bank of Australia (RBA) will cut interest rates for the second time this year in April. To be honest, I am still completely confused as to why the RBA cut rates so soon, because all it has done is to raise pressure on the RBA to continue cutting rates. The central bank spent the majority of 2014 complaining about an overvalued currency and then when the Aussie plummeted by 2000 pips within a period of six months - it decided to cut interest rates, which consequently led to shorts being squeezed.

In regards to the GBP/USD, the pair remains close to its two-week low around 1.4752, with it being particularly noteworthy that investor sentiment towards the Sterling has not changed despite stronger than expected GDP figures from the UK economy earlier in trading. The lack of investor attraction is continuing to bite the pound, and I would attribute the declines seen in the pair over the past two days to the latest YouGov poll showing Labour ahead of the Conservatives before the UK General Election in May. There’s no doubting at all that the election looks like it is going to be close and this is going to fluster investors before the election takes place.

WTI oil has continued to slide down the charts and recorded a weekly low at $47.28. I am not surprised at all to be honest that the commodity has reversed its gains following the unexpected Saudi Arabian led coalition airstrikes in Yemen. Yemen has never been seen as a major oil producer, far from it to be the truth, and the gains last week were purely linked to a hypothetical situation that the airstrikes might disrupt oil production. The reality is that unless the violence becomes further widespread, oil production levels will be left undisturbed and we will continue to have an aggressive oversupply. Those interested in WTI should keep an eye on whether Iran’s economic sanctions do get relaxed because if this occurs it will result in an extra 1 million barrels of oil being pumped into the markets, and the bears will therefore find an opportunity to squash prices lower.

As things currently stand, Gold looks set to record its first three-day losing streak since the middle of March with USD strength pressuring Gold at the beginning of the week. As highlighted above, the stakes are high for Friday’s NFP and I can see the potential in this installing some substantial volatility into the Gold markets.


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