FX Market View #16

The US Dollar rallied following statements from the FED that were more hawkish than previously expected. Lifted higher by the a rise in US interest rates, the Dollar rally was coincided with a sell-off in equities and continued throughout the capital markets. Coming into the weekend the markets did find some stability following the news from the FED minutes. Consequently, the Dollar firmed against the majors and had its best trading week this quarter. Lower levels of market volatility may have contributed towards the greenback’s strengthening, despite the fact that US interest rate yields gain back the gains from the previous day’s trading session.

Heading into the new trading week, investors will be looking for signs of a sustainable Dollar recovery. The economic projections and tone from the FED lean towards the possibility a two rate increases in the long term, however the near term technical picture does not support this. The Dollar’s current path of strengthening appears limited without being supported by higher interest rates. This means that recent move from the greenback will not be consolidated and lead to a short Dollar squeeze. In the past six weeks the Dollar Index advanced higher in five of them, but this can be attributed to an upside correction from it slide at the end of March.

In the new trading week, the market will be reacting to the aftermath of the FOMC meeting. The hawkish comments and forecasts did surprise the markets; however the outcome of this week’s BOE meeting will unlikely deliver the same response. The last time that the BOE met, it was followed by a reduction in the bond buying program so markets will expect a similar conclusion. The other major release for the week will be the Global Manufacturing and Services PMI, along with the US Core PCE data. This economic data will give the central banks information on how industries are performing in their respective countries.

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