The US dollar has continued the bullish bias seen over the last month or so in the last few days.
Since early July, the US Dollar Index has risen from 79.75 to the 82.00 area. Over that time period, the EURUSD has moved from 1.3700 to 1.3300, the GBPUSD has moved from near 1.7200 to 1.6600 and the USDJPY has moved from 101.00 to near 103.50.
The catalyst for the dollar is varied. Against the Euro and the Japanese Yen it is simply a stronger US economy versus weaker economies in the EU and Japan. That benefits the US dollar.
Versus the British Pound, the GBPUSD has been trending higher vs the US dollar since July 2013. During that period the price has moved from 1.4800 to 1.7200. The decline since July is a correction of that move, and a realization that the US economy and the UK economy are running neck and neck. Since the price is nearer high levels, moving back lower makes sense.
What now?
The FOMC meeting minutes and the Jackson Hole Symposium are the next key events forex traders will be focused on. Will it derail the USD's move?
Regarding the FOMC, the minutes are likely to mirror comments made in the most recent statement. In that statement, the Fed said that "labor market conditions improved", but warned that a "a range of labor market indicators suggest there remain significant underutilization of labor resources". They said that household spending was rising moderately and business fixed investment is advancing. They characterize the housing sector as being "slow" and said fiscal policy was "restraining economic growth", but at a diminishing pace. Finally, they said that long-term inflation expectations remained stable. FOMC's Plosser dissented, saying he objected to the guidance indicating that it would be"appropriate to maintain current target range for the federal funds rate for a considerable period time"
If the minutes are to give more color, I would expect it to be more hawkish vs more dovish. That should keep the dollar supported.
Regarding the Jackson Hole Symposium, both Fed Chair Janet Yellen and ECB President Mario Draghi are to speak on Friday (at 10 AM ET and 2:30 PM ET, respectively). Yellen has a tendency to talk to the measures of employment that are not showing strength. The participation rate, part-time workers, those workers who would prefer to work full time, perhaps the young and their difficulty in finding work – all these are concerns to Yellen. The unemployment rate has steadily declined and the nonfarm payroll numbers have been steady and rising in 2014, suggesting improvement. That is good but she still harps on the negative.
The market knows her bias, so it may be priced in if she does give her glass half empty speech. As a result, if there is a surprise, it would be a more upbeat assessment of the US employment trends. I am not expecting, but that would be the surprise.
ECB President Mario Draghi does not have the advantage of a lower unemployment rate. The unemployment rate in the EU stands at 11.5% down from a high of 12%, but still way too high. If he wanted to, he could easily talk to the stubbornly high rate.He could also say how the high unemployment is affecting inflation as well, which remains closer to 0%, then the 2% target that the ECB would prefer to have (the current CPI is at 0.4%). If he were to take this course, it would be bearish for the Euro and bullish for the USD.
Although that is what he should say, he has tended to focus on the stimulus that the ECB has initiated and will initiate going forward and on the idea that the bottom has been found. This tact has tended to provide support for the euro.
I don't know which course either Yellen or Draghi will take. However, Yellen tends to be more negative/dovish while Draghi tends to be more positive/hawkish. This is the opposite what it should be, but it is the way they are programmed.
What traders should be aware of is that when the market is so focused on nuances from words, the tone can change quickly with little effort. Also realize, that it is not what they say that matters in the long run, but what actually is happening in the economies, that will determine the dollar's (or Euro, pound or yen's) trend. As a result, if the dollar does correct, look for the correction to be limited and for the trend higher in the dollar to ultimately continue to the upside as the fundamentals – along with the recent technicals – are supportive of that bias.
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