The recent price action in the majors has been nothing short of interesting and we say that because after the US jobs report last Friday we expected strong gains for the Dollar as investors should have been positioning themselves for a rate hike soon from the Fed. However it seems that this is not the case and yesterday’s trading session made crystal clear that traders are extremely cautious and doubtful on whether the US central will pull the trigger this month.
The performance of the US Dollar across the board and especially against its major European peers has been lacklustre and both the Euro and the Pound benefited from this weakness and reluctance. As a result both currency pairs printed new highs even though there was really no fundamental or technical reason for them to climb higher.
The Euro is trading at the 1.1300 level this morning as yesterday the currency climbed all the way from the 1.1200 area. We admit that we’re a bit puzzled by the recent performance of the Euro, the fundamental drivers behind the currency are strongly bearish and there has been no reason for the Single currency to rally. The only explanation would have been that investors are predicting that the Fed will not hike rates at this time and they are pricing in the effect on Dollar’s price.
Nevertheless, we remain fundamentally bearish over the currency’s outlook, even with the Fed not moving forward this month it is certain that they will do so very soon, possibly even next month. When investors realize that then we will see a massive reversal that will drive the Euro significantly lower so for the time being we remain cautious, we are looking for short-term trading opportunities without losing sight of the broader picture.
The Cable was also on the rise yesterday on the back of the Dollar’s weakness while at the same time the UK currency received support from the BoE meeting on monetary policy. Even though we’ve had no changes in policy the BoE policymakers sounded less bearish that we expected and actually brushed off the recent retreat in the all the business sectors.
The Pound will be the next currency to raise rates after the Dollar and while the BoE backs the domestic economy to do well we could see more short-term gains as the currency rallied to the 1.5450 area overnight. The inflation expectations report today could allow for an extension of the current rally if it prints in a bullish manner.
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