Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

USD Caution On The Currency Markets

Published 04/07/2015, 02:48 AM
Updated 06/07/2021, 10:55 AM


The currency markets have commenced the week cautiously, with the US Dollar mixed against its trading partners. The reason behind the cautiousness in the currency markets is because traders are trying to get their head around why there was such an unexpectedly weak NFP to conclude last week. Questions are going to be asked regarding why the NFP was so off the recent norm, and whether it could be due to some adverse weather conditions at the beginning of the year, or possibly even that the US economy is slowing down. To be honest, I think it’s way too soon to start becoming concerned over the health of the US economy, and what the markets should be thinking about in the shorter-term is that any remaining optimism that the Federal Reserve could hike interest rates as early as June has basically been erased.

I have repeatedly mentioned throughout the previous nine months that the Federal Reserve was never going to allow itself to be hurried into raising interest rates, and you only ever had to look back at how reluctant the central bank was to begin tapering down QE for an example of that. What the unexpectedly weak NFP has provided to the Federal Reserve is a valid reason to remain hesitant towards raising interest rates, but I do not think we have pushed expectations for an interest rate rise any further back than September. It would require a streak of alarming economic data for the Federal Reserve to swerve away from its previous commitment to begin raising interest rates, and for as long as there is optimism that the Federal Reserve will eventually raise interest rates this year – the USD should remain supported. Could there at some point be a widespread USD correction? Only if concerns arise that Federal Reserve will swerve away from its commitment to begin raising interest rates this year altogether.

What needs to be remembered over the upcoming period is that no matter how hesitant the Federal Reserve becomes towards raising interest rates, the US central bank is still going to be raising rates before the overwhelming majority of central banks can even contemplate the idea. Interest rate expectations have also not been the only factor behind the spectacular USD rally, with the other factor behind the increased USD demand being because so many other central banks (around 25 this year) have eased monetary policy. The divergence in central bank policy is driving market volatility, and will continue to do so throughout the remainder of the year.

Who do I think is going to benefit the most over the upcoming period as a result of US interest rate expectations being pushed back? Emerging market currencies, because these currencies have been under intense pressure throughout the previous quarter due to the spectacular USD rally, and emerging market dependence on the price of oil. TheTurkish Lira and Russian Rouble are continuing to strengthen today, while the longer term prospects for currencies such as the Chinese Renminbi, Malaysian Rinngit, Indian Ruppee and Indonesian Ruppiah might now be more positive than they would have been if expectations were still strong for a rate increase this June.

The EUR/USD has once again found resistance around the mid 1.10’s preventing itself from moving any higher, which is providing me with more and more clarity that we could be looking at a potential ceiling for the pair. I have repeatedly mentioned that substantial EUR/USD upside gains are strictly limited to USD weakness, therefore we might not even see the EUR/USD push beyond 1.10 unless there is a widespread USD sell-off down the line. The prospects for the GBP/USD also appear to be bearish below 1.50, with the pair once again finding resistance around the mid 1.49’s preventing entry to 1.50.

I find the GBP/USD an interesting pair to watch, because there is a valid argument that for such strong fundamentals the sterling could be higher priced. The problem that the UK currency faced throughout the first quarter of this year, and which I have previously highlighted this from as early as late 2014, is that the currency was always going to suffer with an extreme lack of investor attraction as 2015 commenced. The Bank of England (BoE) are explicitly dovish regarding its view on inflation, and these views were always bound to strengthen as the price of oil continued to tumble. As a result of unexpected inflation risks, UK interest rate expectations for this year were themselves pushed back and traders began to close GBP positions.

Like the EUR/USD, I also think GBP/USD upside gains are limited to USD weakness. I also do not think the doom and gloom that has sent the GBP/USD down from 1.70 to 1.46 in the past eight months is necessarily over because there is a UK election in one month. If there is one thing that you can accurately say unnerves investors, it is political uncertainty and all indications point towards the upcoming UK election being extremely close. Due to this, I still see the potential for the GBP to be vulnerable to sudden downside risks.


Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime Ltd, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same. There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.