Fundamental Analysis: Dollar Extends Gains Despite Data

Fundamental Analysis: Dollar Extends Gains Despite Data

This week has been surprisingly positive for the US dollar considering the series of negative data releases yesterday. Overall, USD has made significant gains against most major currencies and even reached new highs against the euro.

$1.1250 to the euro was a three-month high for the dollar, reached yesterday afternoon. GBP-USD also saw a month low of $1.2770 last night. Despite sharp losses against the yen yesterday, after poor retail data, the dollar has recovered somewhat above ¥110.40. On the other hand, AUD-USD has been stable this week close to 71c.

Muted reaction to a string of bad data

The dollar mostly extended recent gains in the first part of the week, backed mainly by rate differentials. Also a factor in the dollar’s favor were recent rallies for American shares: the S&P 500 and Nasdaq 100 have both made strong gains this week. Fluctuations in equity markets have affected the dollar significantly over the past few months due to the impact they have on demand for USD among investors in deliverable assets.

Many traders had seen yesterday afternoon’s data as a potential turning point. December’s retail sales came in negative, missing expectations by more than one percent. The producer price index was also negative. The reaction to these and other less important releases was fairly short-lived though, in most cases. Only against the yen did USD’s decline extend more than a few hours.

Strength for the dollar comes from it being arguably the best of a bad bunch this week. Gains for shares on the whole have been negative for the yen, growth in the eurozone remains a concern and of course Brexit uncertainty makes the pound unlikely to stage much of a recovery anytime soon. More growth-sensitive currencies like the Aussie and Kiwi dollars have done better against USD though.

Minutes from the FOMC will be key

It’s likely to be a slow start in currency markets generally next week, with holidays in both the USA and Canada on Monday. The important event to watch is the release of the minutes from the Federal Open Market Committee’s latest meeting. This release is expected at 19:00 GMT on Wednesday night.

Traders typically look at these minutes from the Fed to determine what the overall attitude of the committee is towards prospects for future monetary policy. Comments on inflation and the effects of the higher funds rate on shares are likely to be especially important.

Meanwhile the crucial release that might give some more direction to AUD-USD is the release of Australian employment change. Due at 00:30 GMT on Thursday morning, the current consensus predicts a drop to 15,000. If true, the release might catalyze another downward movement for AUD-USD.

USD set to strengthen next week

Based on fundamentals in general, the dollar’s most likely to continue making more small gains against most currencies next week. While the FOMC’s minutes do have the potential to increase volatility on Wednesday evening, this release is unlikely to affect the overall picture unless it contains significant surprises.

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