rahul.khanna's picture

Is USD rally ready to resume?

The USD has started to consolidate post Yellen’s speech last Friday. The medium-term trend is up and the very short-term trend has also started to turn bullish. However, it’s is quite likely for markets to still wait for a confirmation from US non-farm pay rolls before medium-term positions are taken. 

For the Euro-zone we have seen sentiments improve since Mario Draghi announced QE plans, this view is supported by Euro-zone economic sentiments registering a 4-year high on Monday. This has even caused some analysts to believe that the current ECB plan to continue QE well into September next year may be short-lived (to current year-end). Some of these sentiments will be doused by the March Euro zone CPI figure which came at -0.1%. Also Greek vows and a lot of economic uncertainty regarding the Euro-zone will keep the EUR on a softer footing until there is a considerable improvement in economic data.

Whether USD continues to trend, consolidate or even dip will depend quite simply on two factors: one factor will be economic data over the next few weeks, most important being US Non Farm Payroll on Friday, and the other factor will be the Fed’s tolerance to an appreciated USD. The second factor is quite correlated with the first and is unlikely to be much of an issue over the shorter-term. However, a continued decline of the EUR may cause the Fed to participate in a currency war, especially if it views a strong USD having a determinant impact on US companies’ competitiveness globally.