Dollar Rallies on Strong Macro data
Forex markets saw volatility pick up mid-week as important macro economic data was key in guiding sentiment and direction. The first release was the ADP employment report, which is often used as a precursor for the Non Farm Payrolls, and came in much higher than analysts had expected. The ADP report showeda monthly rise of 188,000 jobs, and this set the US Dollar on a course to close strongly on the week. These moves continued on Friday, as the Non Farm Payrolls were also much stronger and this took key currency pairs like the EUR/USD and USD/JPY into new territory. The USD/JPY is now firmly above the psychological 100 level, and the EUR/USD is seen pressuring critical support near 1.28.
Any additional follow through in these areas will suggest that the Dollar will remain strong through the rest of the month, and probably the remainder of the summer. Part of the reasoning behind this Dollar strength is coming from the fact that strong performances in the labor market will mean that it is more likely the Federal Reserve will be able to start cutting back on its quantitative easing stimulus purchases. This is a bullish scenario for the Dollar, as it will mean the same number of people are chasing a smaller amount of assets (the currency itself). At the moment, markets are expecting the Fed to start reducing its quantitative easing programs in September, so it is unlikely the Dollar will see any major declines until then.
The Week Ahead in Forex
Next week will see a relatively limited data docket, as the major event risks in the near term were mostly concentrated in last week’s activity. Looking ahead, the main factors for the forex markets will center on the next round of commentary speeches from voting members at the Federal Reserve. Any indication that the Fed is feeling confident about the economy will lead many market analysts to start making the case for an ending in stimulus programs, and this will add to the recent weakness in both the Euro and the Yen.
The summer months generally witness a slowdown in price volatility but so far this has not been the case for forex traders. This typically occurs because there is a reduction in market liquidity, but with the near term future of asset movements still largely unknown, most of the trading activity has not been taken out of the market. Next week will be key for determining not only the price direction trends that will be seen for the rest of July, but for assessing the prospects for summer volatility as well. As the Asian session begins trading on Monday, it is likely we will see some additional strength in the US Dollar, as Asian traders have not yet had the opportunity to respond to the bullish employment data from last Friday.