Dollar Bulls Continue to Dictate FX Flows | Go Markets Daily FX Commentary

• Aussie dollar continues to feel the pressure of weakening commodity prices;
• Sterling struggled to maintain gains against a firm greenback following Scotland referendum;
• Euro continues to slide at the mercy of strong US dollar on Central Bank divergence;
• Long dollar bets mount on revised US GDP and rate hike speculation.

As speculation mounts that the US Federal Reserve will increase rates by the middle of 2015, the Australian dollar recorded its lowest levels in over 7-months last week. A slowed Chinese economy, weakening commodity prices and some exchange rate jawboning from the Reserve Bank of New Zealand all contributed to Aussie dollar losses last week. However, the real story is hype surrounding when the Fed will lift interest rates as data continues to point towards tightened monetary policy in the world’s largest economy. Traders focussed on the RBA’s financial stability review last Wednesday which was the Central Bank’s opportunity to express its concern of soaring house prices and the risks posed on the local economy. The local currency has firmly detached itself from trading ranges that had become prevalent for some time, dropping over $0.06 in the past three weeks as it continues to play catch up with an improved US economic outlook. It would be a brave move to stand in front of the US dollar in this market, particularly with the absence of encouraging domestic data, hence the Aussie struggling to find its feet.

Despite weakness in the face of an increasingly bid US dollar, Sterling is somewhat back on track after a momentary lapse in the doldrums in the lead up to Scotland’s referendum. Comments made by the Governor of the Bank of England suggested that a hike in interest rates could be on the cards in the near future as he spoke in Wales last week. In what was otherwise a quiet week for UK data, comments sent Sterling to its strongest level in two years against the Euro which continues to remain broadly offered by the wider market. We’ve heard similar rhetoric from the Bank of England previously which has seen the market get carried away with speculation of a rate hike. However, last weeks comments were backed up by the Deputy Governor of the BoE who suggested that a lack of wage growth throughout the UK may not prevent the Bank from lifting interest rates and built up pay pressure may eventuate in a surge in wages, therefore impacting inflation. Despite this, traders remain wary of buying the pound against the US dollar as the race to lift interest rates continues.

A string of negative economic indicators from the Eurozone last week highlighted the significance of monetary policy divergence between the ECB and its peers. Beginning the week with weakened Eurozone PMI data followed by weakening German business confidence, traders continued to position themselves for the likelihood of quantitative easing across the Eurozone in a last ditch effort from the ECB to prevent a period of deflation. Key releases from the Eurozone this week include German CPI, Eurozone CPI and labour market data from Germany and the EU as a whole. All will be delivered ahead of the ECB’s rate decision and press conference on Thursday evening and markets will likely tread with caution ahead of the decision, with EURUSD continuing to trend lower ahead of such risk events.

As the dollar bull run remains in full force many of the key themes continue to recur, namely the divergence in monetary policy between the US Federal Reserve and peers in Europe and Japan who continue to maintain accommodative monetary policy to aid their respective economic difficulties. Encouraging data last week certainly indicated that a US rate hike is on the cards in the near term and data from the world’s largest economy in the coming week will likely confirm such an opinion. Inflationary indicators, consumer confidence, manufacturing and key labour market data is all on the docket in the coming week, all of which hold the risk of disappointing the market. However, the more likely scenario is that any weakness in the greenback will present an opportunity to those who have missed recent rallies in the dollar to position themselves ahead of what will likely be an encouraging non-farms number on Friday.