Another day and another volatile session for the U.S. dollar, which had big swings yesterday. Traders will remain very sensitive to any upcoming economic data and most of the trading action will be driven purely on speculations. However, we maintain our view that the dollar may continue its upward trend against the major basket of currencies. Any upcoming good news could going fuel the dollar rally and we may see more dollar short squeeze.
Inflation and wage growth, which remain the top two agendas for the Fed, have provided some mixed signals yesterday, which triggered a sell off initially, but then when investors do look at the bigger picture, they do feel that any sell off is a buying opportunity when it comes to the green back. We do not think that the CPI growth of 0% will prompt the Fed to raise the rate alone, but given the comments by the Fed’s president, Bullard and James, it is difficult to think that the rate hike will not take place this year. Our main concern is the wage growth data, which yesterday have not shown robust reading, but still on the recovery path and as long as this continues, we do believe that the rate hike can take place in September.
Back in Europe, the euro zone’s recovery remains the main focus and this is driving the trading action. The Eurozone’s PMI number released yesterday has given another evidence that the ECB’s QE maintains its positive impact on the economy and boosting confidence in the region. Germany without any doubt is the biggest beneficiary of the weaker euro and the QE hence, all the three major PMIs are printing strong readings on a consistent basis. However, this was not the aim for the ECB because they do want the positive impacts of their monetary to spill over to other countries and the economic data for other eurozone countries is also improving. The weaker euro and the ECB’s QE still need to inspire more confidence for the problem child of the eurozone, France, whose services and manufacturing PMI print released yesterday was not that inspiring at all.
So the big question remains, are we going to see more strength for the euro and if there are still odds stacked in favour of the euro breaking the 1.05 level? We believe that upside is limited for the euro and it may find big resistance near the 1.12 and there are still strong chances of it breaking the 1.05.