Yet another day of weakness for the Dollar yesterday when the US currency has fallen to a 1-month low against the rest of the major currencies with the likes of the Euro and the Pound benefiting from the drop. The Dollar has been weak across the board all week now and that has allowed the other global currencies to post strong gains casting doubts on the bucks’ outlook.
We have mentioned in our previous reports the possible reasons why the Dollar is taking such a beating: the overbought state of the currency, the fall in oil prices and the less dovish comments made by ECB officials in their recent statements. However as we move closer to next week’s Fed meeting one would expect the Dollar to start picking up pace again unless market participants are really doubting the meeting’s outcome.
We will have plenty of time to assess that next week but today the focus is on the Pound as the Bank of England policymakers will meet to deliver their rate decision. During the past month there has been a mix of data from the UK with as much improvement as deterioration in various sectors of the economy. However with the Euro having appreciated a lot since then against the Pound BoE’s inflation targets should be easier to reach and that could allow for a less bearish stance today.
From a price action perspective, yesterday has been quite an active day with the Euro rallying to the 1.1000 area having extended its move to the upside to 500 pips since the beginning of the month and the ECB decision last week. The only important risk for the Single currency is the release of the US Retail Sales tomorrow unless the ECB decides to intervene verbally and talk down the currency. Keep in mind that with the Euro at 1.1000 their current easing program is far less effective.
The Cable has rallied versus the Dollar as well and yesterday the move drove the UK currency almost to the 1.5200 area as the currency pair got short squeezed like the Euro did last week. Today’s BoE rate decision is a risk factor for the currency but as we mentioned above we estimate that the most likely scenario is a less bearish stance from the BoE. However the question is how far can the Cable go after its current 250 pips rally from the 1.4950 lows but we will find out soon enough.
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