Last Friday saw the Chairwoman of the Federal Reserve of the United States, Mrs. Yellen, giving a speech that was considered pretty bullish for the US dollar.
The speech came after the Core CPI (Consumer Price Index) numbers came in way better than expected. From that moment on, pressure on the Fed to deliver started to mount again.
Needless to say, the EURUSD dipped all the way below 1.09 again on Friday. Just one week earlier, it was flirting with the prospects of breaking the 1.15. What a difference a week makes.
Since Friday, each and every economic release out of the United States has come in better than expected, and the market is taking this as a positive sign Fed will hike interest rates.
We had the Durable Goods Orders release this week. While the actual number was not that impressive, the core durable number posted (non-defense), was impressive. This is important as it has its roots in the GDP (Gross Domestic Product – the total value of goods and services an economy produces).
Again, markets focused on the core release and sent the US dollar higher. The EURUSD made new lows, below 1.09, and USDJPY broke the 123 mark. We have expected the USDJPY to be bullish, and the 123 price that this move attracts didn’t take us by surprise. What would be surprising would be the Fed to hike rates in June.
Personally, I don’t think that this will happen, and even Mrs. Yellen suggested a June hike is not on the table. However, if data continues to come in beating expectations (and all eyes here will be on the GDP release on Friday, as well as on the NFP number at the start of the new month), then Fed will have to deliver.
One remarkable answer to a rate hike question came from Fed Vice President, Stanley Fischer. He said that even a rate hike doesn’t really mean much as they are talking about a quarter of a basis point increase, and this increase comes from 0 to 0.25, meaning from ultra-low monetary policy to extremely loose monetary policy. What he actually wanted to say was the fact that markets are overreacting to this rate hike, and that even a hike means pretty much nothing if it is not followed by gradual increases.
In this environment in which uncertainty prevails, I would favor a lower US dollar over the short-term or to be more exact, for the rest of the year. This remains true with or without a hike, with EURUSD bouncing to around 1.20 level, and the GBPUSD flirting with 1.65 yet again.
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