Retail currency traders can’t seem to make up their minds which way they are going with the USD. The GBP/USD pair is currently flying high at 1.2902, well ahead of the 50-day moving average and the 200-day moving average. This boost took place when Prime Minister May announced that the UK would be holding general elections on 8 June 2017. The effect this had on the sterling was dramatic, sending it from around 1.250 to 1.280 in short order.
That the GBP/USD pair has managed to maintain momentum and push towards the critical 1.300 handle is impressive. However, as we have seen the GBP is being repelled from that critical handle and finding support around 1.288/1.290. Given the poor performance of the cable since the June 23, 2016 referendum, current trading levels are a welcome boost to sterling bulls.
What impact is the EUR having on the USD?
The EUR/USD currency pair is closing in on the critical 1.1135 level. This marks a dramatic turnaround for the pair over the short-term. Currently, the EUR/USD pair is up 0.82% at 1.1068, and rising steadily. There are some concerns among binary options currency traders that the US economy is not quite where it should be. The release of GDP data for Q1 2017 was hardly encouraging. Now that we are in Q2 2017, there is little to support the notion that the US economy is buoyant. Part of the reason optimism has been tempered is retail sales figures and the CPI reports.
According to the CME Group FedWatch tool, the likelihood of a June 14 rate hike by the Fed is now 78.5%. A week ago (May 9, 2017), that figure was 83.1%. This indicates a lower likelihood of a rate hike which is weighing heavily on the greenback. If we turn our attention to the US dollar index – a key indicator for dollar strength or weakness – some interesting facts emerge. The DXY is now at 98.32, down 0.56% on the day (May 16, 2017). The 5-day performance of this critical index is down 1.21%, and the 1-month performance is down 1.17%. If we extrapolate further to 3 months, the DXY has shed 2.86% and for the year to date it is down 3.95%.
What does this mean for currency traders of the GBP/USD pair?
Simply put, the US dollar is trending bearish for the year to date. One of the most important aspects of the dollar’s recent performance is the strength of the EUR. Recall that the 6-currency DXY is comprised of the EUR (57.6%), JPY, GBP, CHF, SEK and CAD. The GBP is surprisingly low in that metric at just 11.9%. This means that when we are evaluating the US dollar index, the most critical determinant is the EUR.
The recent French election results confirmed that there is a strong case for European unity. Multilateralism has trumped unilateralism, and the collectivist mindset in Europe is alive and well. That the European Central Bank is pushing towards monetary tightening is also encouraging for the EUR and this is helping to weaken the USD and strengthen the GBP/USD currency pair.