Dollar Strength Continues After Supportive Macro Data
The US Dollar saw some declines early last week but later continued with the strong rallies seen during most of the month of May. The strength in the US Dollar has been largely propelled by differing central bank biases, with the US Federal Reserve much more likely to end its cycle of monetary easing when compared to other central banks around the world. Specific examples of easingpolicy can be seen in both Japan and the Eurozone (and in China, to a lesser extent). The combination of these factors has been largely bullish for the US Dollar, and for the most part, this trend is expected to continue as long as these central banks maintain their recently announced biases.
Additional factors to consider can be found in macro data, which points traders in a similar direction: Down for currency pairs like the EUR/USD, AUD/USD and NZD/USD and upward in pairs like the USD/JPY. On the whole general strength is expected in the US Dollar, with more pronounced weakness in the Yen and Euro. Macro data was largely negative in the Eurozone last week, with the region’s unemployment rate rising to new all-time highs. Overall, the numbers showed unemployment levels rising to 12.2%, with those under the age of 25 seeing an unemployment rate of 24.4%. These are relatively alarming figures and essentially show that the European Central Bank will be unable to reverse its policy of monetary easing. This is not positive for the currency, so it is now increasingly likely that we have already seen the yearly highs in the EUR/USD.
The Week Ahead in Forex
Last week’s trading activity was limited due to the Memorial Day holiday in the US. This reduced volatility and brought a relatively slow start to the week and the dominant trends did not do much to establish themselves until Thursday and Friday. As such, traders should expect the more severe weakness in the Euro to continue . German Retail Sales came in particularly weak and this removes one of the hopes that the Eurozone’s largest economy will be able to act as a driver of growth in the region’s recovery.
But it should also be remembered that we are now coming into the summer months, and this generally leads to declining price volume in more of the active trading markets. As such, traders should look for new trading ranges in currency pairs and then base positions off of those levels of support and resistance. Breakout scenarios are much less likely during the summer, so this allows traders to keep stop losses tighter and increase the frequency with which trades are placed. This also allows for greater leverage levels, as there is a decreased likelihood that markets will see impulsive price moves of larger magnitude. Carry trades are another preferred strategy in this environment, as there are greater benefits to taking longer term gains from interest rate differentials.