Dollar Strengthens in Quiet Holiday Trade; But Is It Still Vulnerable?

[DailyFx]

In a very quiet start to the trading week marked by holidays in UK and US the dollar strengthened somewhat against the majors after taking a beating for most of last week.
Talking Points
• Japanese Yen: quiet despite 2% fall in the Nikkei
• New Zealand Dollar: Trade deficit widens on one off charges
• Euro: consolidates around 1.5750
• Pound: Weakens as Home track falls most in 3 years
• US Dollar: Memorial day



In a very quiet start to the trading week marked by holidays in UK and US the dollar strengthened somewhat against the majors after taking a beating for most of last week. With US capital markets closed for Memorial day holiday and UK markets closed for a bank holiday trading is expected to be very light for the rest of the day.
Nevertheless the greenback gained some ground mainly on light profit taking in the EURUSD. Against the pound the gains in the greenback were a bit more substantial as the release of Hometrack survey in UK showed that house prices declined by the biggest margin in 3 years once again stirring speculation that the deterioration in that key sector of the UK economy will force BoE to ease. Markets continue to price in at least 50bps in cuts before the end of the year and that expectation is likely to contain any cable rally to the 2.000 level. Last week the unit got a bump from better than forecast Retail Sales, but the absolute number still printed negative indicating that the UK consumer is retrenching.
Elsewhere, the kiwi dropped at the start of trading in Asia as larger than expected Trade deficit generated some panic selling at the start of the session. On further examination however, traders realized that the gap was caused by one off items, as a purchase of an oil platform drove imports higher than expected. On the other hand exports also increased better than forecast, suggesting that demand for New Zealand’s agricultural products shows little evidence of waning. The unit recovered its losses as the night progressed
With traders coming back in full force tomorrow, attention this week will likely center on US Durable Goods and GDP numbers. Markets are looking for a revision upward in the GDP report, led by improving exports and shrinking Trade deficits. That number may help the greenback some, but the key determinant of dollar’s direction will continue to be the state of the US consumer. If gasoline prices remain sticky above $4/gallon, it is difficult to imagine any other scenario but a recession for US economy as we move into the 2nd half of the year.