Many traders have been caught by surprise by the extent of the dollar’s decline over the last week. The USD index fell below 91 for the first time since January 2015, and Friday’s 0.96% drop, was the second biggest since January 2017. More surprisingly, the U.S. data released over the last week certainly doesn’t justify a dollar selloff. U.S. core consumer prices recorded their largest increase in 11 months in December, rising 0.3%. Retail sales for December rose 0.4%, whereas core retail sales increased 0.3% after an upwardly revised 1.4% surge in November. The two tier-one economic reports sent expectations for an interest rate hike in March to above 72% from just a 50% chance last month. This clearly suggests that internal data did not inspire the dollar selloff, but rather, external developments played a role.
Given that the euro holds the most weight in the dollar’s index, constituting about 57% of the weight, the single currency movement, spurred by political and monetary policy developments, is dictating the DXY’s direction. On the political side, the coalition deal between Angela Merkel and social democrats was a great relief, after nearly four months into Germany’s general election. More importantly, the shift in ECB’s language is a new development sparked by hints that the Governing Council agreed to review its policy language early this year. However the hawkish comments recorded in the December minutes, were made before the release of the Eurozone inflation which slipped further away from the Central Bank’s target ending the year at 1.4%. The ECB will meet in 10 days, and unless Mario Draghi finds a way to convince markets that the unwinding of stimulus will be very slow, I think the euro will be marching towards 1.25 by end of Q1.
The pound’s performance was also outstanding after GBP/USD managed to break above the 1.3656 resistance level. Reports released on Friday that the Spanish and Dutch are willing to reach a soft Brexit deal helped to fuel the rally. The U.K. parliament will be meeting on Tuesday and Wednesday for another debate over Brexit, so a close eye should be kept on new developments.
This week, inflation figures once again will be under the spotlight in the UK and Eurozone. I think if we get any surprise on Tuesday, it will be to the downside, so the rally in both currencies may pause.
The Bank of Canada will also be under the investors’ radar as the central bank is expected to hike rates by 0.25% on Wednesday. This comes despite lot of uncertainty towards the Nafta talks.
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. FXTM, 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.
Risk Warning: 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.