Is The Dollar Back? | CA

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

defied fundamentals on Friday, hitting a 7-week high above 112. The strengthened against all of the major currencies with leading the slide. grew at its slowest pace in 6 months but the dollar rallied because every policymaker who spoke on Friday said more tightening beyond September is needed. Even FOMC voter and Fed President , who is traditionally a dove, suggested that the Fed could continue to raise beyond the long-term neutral rate. , who is not a voting member of the FOMC, described the economy and labor market as very strong and suggested that 4 hikes for 2019 is still reasonable because he wouldn’t be surprised if inflation goes a little above 2%. agreed that the U.S. consumer is strong. Hawkish comments such as these drove above 3% on an intraday basis on Friday and this move took USD/JPY to its highs of the day above 112. The Federal Reserve is still expected to raise interest rates this month and that’s the only thing that matters. The trend is strong in USD/JPY and the pair could continue to rise but it will be vulnerable to the Bank of Japan’s outlook and trade headlines. No changes are expected but the BoJ has been actively engaged in stealth tapering and investors will be watching closely for any comments on these actions.

The momentum for shifted back to the downside with Friday’s reversal. The euro rallied after the ECB’s meeting on Thursday but on Friday, there were reports that some policymakers wanted a more cautious tone that suggested the risks were tilted to the downside. Data was also weak with the Eurozone’s shrinking to its smallest level in 4 years in July. The divergence between Draghi’s outlook and the performance of the economy makes next week’s and economic activity reports very important. If CPI and PMIs also surprise to the downside, EUR/USD will fall to 1.15. However if Draghi is right and the PMIs show that the outlook for the economy remains bright, EUR/USD could squeeze back above 1.17.

turned lower on the back of strength and conflicting Brexit headlines. Brexit talks are moving in a positive direction but the Irish border is still the big problem. UK Brexit minister Davis thinks they are closing in on a deal but the EU denied the progress. Either way, Brexit headlines and UK data puts sterling in focus next week with and numbers scheduled for release. GBP/USD ended Friday at its lows, putting the pair at risk of testing 1.30.

Although the and dollars hit fresh 2-year lows this week, both currencies rebounded on the back of stronger data. In Australia, business conditions improved and strengthened and in New Zealand activity accelerated for the first time in 4 months. There are no economic reports from Australia but numbers are due from New Zealand next week. Despite the decline in , stronger and trade activity should bolster growth in Q2. Trade headlines will continue to pose a risk to both currencies as the U.S. threatens China with additional tariffs while proposing a new round of talks. Both currencies turned lower on Friday, shifting momentum back to the downside.

Meanwhile Canada-U.S. trade talks failed to yield any meaningful progress this week. Canadian Foreign Minister Freeland should be back next week to continue negotiations. The main issue is dairy – Canada restricts how much foreign milk is sold to the benefit of its local industry but the U.S. wants those restrictions relaxed so U.S. producers can sell more milk and cheese to Canada. Freeland is the first to admit that plenty of work still needs to be done and according to reports this week, President Trump is willing to drop Canada from the U.S.-Mexico-Canada pact if they don’t agree to his terms. The talks haven’t completely broken down but investors aren’t happy with the progress so far, hence the recovery in . Canada’s economy will also be in focus next week with and reports due for release.

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