Incredible Turn Around in The US Dollar
In the forex markets, the dominant theme last week was the incredible turn around in the US Dollar, driven largely by improvements in macro economic data and the changing bias in the market’s underlying risk sentiment.The main event was seen on Friday, as the US economy posted monthly job gains of 204,000 jobs for the month of October (as evidenced by the latest Non Farm Payrolls release). Markets were expecting a number that was almost half of the actual result, so it is not a big surprise to see that investors responded in the way that they did. It is actually must more uncommon to see analyst estimates miss by as much as they did, so we will need to wait for the next release in order to determine whether this was simply a one-off event or the beginning of a much larger positive trend.
In addition to this, we had some central bank news that was highly bearish for the Euro. Specifically, the European Central Bank (ECB) took markets by surprise and lowered interest rates to new historical lows. This was another example of a big miss in terms of the analyst estimates, so the reactions in the Euro were forceful here as well. The move shows that the ECB is more concerned with the state of the economy than previously expected, so we are now looking an an extension of the policy easing cycle that could easily being the EUR/USD back into the 1.20s. This fundamental forecast is largely based on the potential divergences in policy stances that could now be seen when comparing the ECB and the US Federal Reserve.
The Week Ahead in Forex Markets
Looking ahead to next week, forex traders should expect at least some overhang from the major moves seen last week. This will likely be true for two reasons: First, Asian markets have not yet had an opportunity to react to the data releases seen on Friday. Second, the changes in momentum have been decisive and will be difficult to reverse. The US Dollar is now trading at its highest levels in two months. Next week, however, we will likely see some declines in volatility as the data and event calendar for next week is relatively sparse.
One potential factor that could move markets next week would be any central bank commentary, either from the ECB or Federal Reserve. The main questions here center around the longer term policy perspectives at both bodies because there is now strong reason to believe that we will see some significant differences in the paths forward for the Fed and ECB. At the moment, the most likely possibilities heavily factor the Dollar relative to the Euro into the final months of the year, so expect many forex traders to look at Dollar dips as a new buying opportunity. Either way, these trends should continue for most of next week.