20th May - The Dollar is set to gain strength
23 May 2016
TECHNICALS:
WEEKLY Dollar euro futures continuation chart
The Dollar has been edging sideways since the beginning of 2015.
And it looks as if it is retreating from the upper boundary (say 1.16) of that trading range again…
And anyway, if that wasn’t bearish enough for the Euro bulls, above that trading range, is the massive long-term resistance from the lows in 2010 and 2012.
But the Euro bulls have never been able to get up that high.
Daily Dollar Euro chart
The Euro weakness and Dollar strength is reinforced by a look at the nearer-term picture: if the Euro had had any resilience there should have been support from the Prior Highs 1.1375/1.1465.
But there was no support from them.
The Dollar bulls are in charge.
FUNDAMENTALS:
The recent weakness of the Dollar against the other majors, but especially against the Euro, coincided with a run of several months of weak economic data, which began almost immediately after the Fed hiked rates back in December 2016.
The collapse in data, especially GDP, and the flagging of a recession in manufacturing by the ISM Manufacturing survey, forced the Fed onto the back foot and resulted in a distinctly more dovish tone from policy makers.
Indeed, there was such a change of rhetoric that the policy goal of 4 rate hikes during 2016 made at the December 2015 FOMC meeting was watered down to only two and for a while even that was in doubt. The result was a weakening of the Dollar.
Now, this month, data has sent out conflicting messages:
Where then did that leave the Fed? On Wednesday we found out. The FOMC minutes from the April 26th - 27th meeting made it clear the Fed was still looking for an opportunity to hike twice this year and if data turned positive, as early as the June meeting.
While the minutes acknowledged that obstacles lay ahead, policy makers are clear they want to get on with the task of normalising policy.
But those minutes relate to a meeting that took place before either the most recent non-farm payroll report and retail sales report was known. Will those releases have changed the Fed’s stance further?
Clearly, currency traders think the risk of a June rate hike has materially increased and the recovery seen in Dollar/Euro over the last day or so reflects this. But before the next FOMC the June non-farm payroll report will be released. We think that report could prove a deciding factor.
If the report confirms the weakness seen in May’s release, we judge the Fed will probably delay, if however, the report is back on trend or better, a rate hike seems highly likely. That is because the Fed has long cited the labour market as one of its foremost indicators for formulating policy.
Where then for the Dollar?
We judge the Dollar is likely to continue its current recovery. It will be buoyed by last Wednesday’s FOMC minutes as traders think that the Fed is looking through the current spell of weakness, expecting the economy to bounce back.
Assuming that is the outcome and June’s non-farm payroll report signals that a recovery is indeed under way, with at least a trend report, the Fed will probably nudge rates higher by a further ¼ point.
There is one caveat; the Q1 GDP report will get another airing in the next few weeks, if it is revised lower, not our central expectation, the Fed will have to wait a little longer. That though isn’t our expectation, and in all probability US interest rates could be moving up in June and the value of the Dollar with them.
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3rd June - Dollar strength and Euro weakness 
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13th May - Time to buy Short Sterling