Dollar Rally Forces EURUSD and USDJPY Breaks

Dollar Rally Forces EURUSD and USDJPY Breaks

Posted on Aug 21, 2014 at 09:57 AM

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Dollar Rally Forces EURUSD and USDJPY Breaks

Between two days of key event risk, it seemed that the US Dollar was due a period of moderation. However, this past session was anything but. The normally boilerplate FOMC minutes offered up a surprisingly hawkish lean and extended the currency’s impressive run this week. This extension has raised the stakes for the dollar’s trends. Aside from the Dow Jones FXCM Dollar Index (ticker = USDollar) advancing to six-month highs, we find that many of the majors are attempting to tip the scales into key breakouts. Key among these standout moves are EURUSD, GBPUSD and USDJPY. Each carries a different level of fundamental headwind and thereby carries a different gauge of the dollar’s strength. EURUSD sets the currency against a currency that projects an economic performance and monetary policy bearing that stands into direct contrast to the US. The Cable is a more significant fundamental balance with UK growth and BoE rate forecasts outpacing their counterpart. Then there is USDJPY – a cross that shares a distinct relationship to equities through carry and investor appetite. For the dollar to maintain this exceptional run, its fundamental backing will have to build steadily. The current trend has been founded on a material upgrade to interest rate expectations. Tuesday’s July CPI figure may have kept the ‘mid-2015’ time frame for the first Fed hike in contention, but falling in-line with consensus did little to embolden rate hawks or convert the complacent and doves. The Fed minutes were far more effective in that capacity. According to the transcript of the July 29-30 meeting, “many Fed officials” believed the pace of job gains may bring forward the first Fed hike. On inflation, “most” saw downside pressures on price growth diminishing. While not stamping a specific date on the first 25bp hike, this presents a tangible hawkishness. Ahead, we are set for another round of rate fodder in US manufacturing activity data and the start of the Jackson Hole Symposium. One element in this slow but measureable change in monetary policy from one of the first adopters is its impact on risk trends. Will the low volatility environment hold out as the easy money is slowly reined in?     WWW.LOGINTRADER.COM


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