Market Drivers April 10, 2015

Euro pops 1.0600 as Dollar Rally Relentless
UK IP/MP weaker than forecast
Nikkei -.15% Europe 0.49%
Oil $50/bbl
Gold $1202/oz.

Europe and Asia:
CNY CPI 1.4% vs. 1.3%
GBP UK IP 0.1% vs. 0.3%
GBP UK Construction -0.9% vs. 1.9%

North America:
CAD Employment 8:30

The dollar rally was relentless on the final trading day of the week as shorts pressed the 1.0600 level in EUR/USD in morning London dealing before some bargain hunters finally stepped in to arrest the decline. The EUR/USD has now dropped four big figures this week as yield between EU and US continue to widen and capital flows move to this side of the Atlantic.

Perhaps the single biggest reason for the change has been a shift in market’s thinking about the June rate hike. Last week, after a woeful NFP and a series of lackluster economic reports, the prospect of a June rate hike appeared minimal. This week however the release of the FOMC minutes and commentary by William Dudley – the New York Fed Chief who is a well established dove, suggested that the Fed was still considering the move towards normalization as early as this summer.

At very least, with job demand at a 12 year high, US policymakers are keen to leave the zero bound of monetary policy sooner rather than later and that has translated into higher 10 year yields this week as they rise more than 10bp off last week’s lows. The key question going forward however is whether the fundamental data will support this thesis going forward.

Many analysts believe that weather played a great part in suppressing economic activity in Q1 of this year.If that is indeed true and pent up demand results in better US growth in Q2, the dollar rally is sure to continue with euro shorts likely to test the multi-year lows around the 1.0500 level. For now the pair still remains within its broad 1.05-1.110 range.

With no US data on the docket today currency traders are likely to look to the fixed income markets again for direction. The EUR/USD has now become oversold in the short run and could see some short covering into the weekend, but if the yields on the 10 year approach 2% the pair could see another wave of selling as the day proceeds.

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