US Dollar’s Overcrowded Trade Seeks Relief

  • EUR knock-out options triggered topside
  • Durable goods miss could pressure dollar bulls further
  • Eurogroup talks to yield no progress
  • German sentiment keeps on ticking over

It’s easy come and quickly gone for the dollar bull this month. The mighty buck is closing out this week slumping to a new two-week low against the EUR (€1.0900), pressed by soft U.S. data released yesterday (new home sales -11.4%, month-over-month) that knocked a number of fixed-income dealers’ confidence in the likelihood of a U.S. rate hike this year.

The one direction long dollar trade has been on a blistering pace the past few months. The USD’s rise across the board is being fueled by rate differentials — the market’s expectation that the Federal Reserve will begin its rate ‘normalization’ process while other central banks will continue to aggressively ease. The dollar has rallied more than +11% against the EUR so far this year, but a slew of recent downbeat data has the market asking awkward questions that have the overcrowded long-dollar trade under pressure.

Fed Hawks and Doves to Battle It Out

The Fed meets next week and must judge the U.S. economy’s mixed signals alongside an economic slowdown in China and other parts of the globe. With the market now pushing the Fed’s first rate hike further out the curve (58% expect a September hike, down from +73% last week), it is not helping any long-term USD bulls’ positions.

The markets will wait for the usual set of headlines related to Greece from the Eurogroup meeting in Latvia. In the meantime, there is data out later this morning in the form of U.S. durable goods (core +0.2% versus -0.6%, month-over-month) to focus on that could weigh on expectations of the Fed tightening. Any disappointment will only cause the USD to consolidate further as we close out this week. U.S. durable goods tend to be a volatile series, but it will be used to fine-tune forecasts for first-quarter gross domestic product (GDP) data (+1.1% expected) due for release on April 29. A weaker first quarter is expected by the data-dependent Fed, and it should be explained away on weather-impacted weakness. It’s the potential growth expectations and how aggressive an anticipated rebound will be in the second quarter that will have the Fed hawks circling next week.

German Business Sentiment Continues to Rise

Although expectations are quite low for any agreement on Greece’s bailout extension and reform plans, there is optimism that one could be hammered out by end of June. The rumor that Greece seems to have secured +€450 million from local authorities makes it unlikely of any near-term default in May, and it spurred the EUR to a two-week high against the greenback.

Helping the single unit this morning is this month’s rise in the German Ifo Business Climate survey. It suggests that economic conditions in the eurozone’s largest economy continue to tick over despite the Greek crisis. This is a welcome relief for the EUR bull especially after falls in the ZEW (53.3) and purchasing managers’ index (51.9 manufacturing, 54.4 services) surveys this week.

The increase in the headline index, from 107.9 to 108.6, was stronger than the consensus forecast of a rise to 108.2, and left the index at its highest level in 10 months. On the face of it, the index points to German annual GDP growth rising from the fourth quarter +1.5% to about +2%. Business sentiment still seems to be responding to a weaker EUR and the decline in the oil price. Nevertheless, the weaker surveys and the potential event risk fallout from Greece should be capable of limiting the EUR’s rise.

For the weaker dollar longs, there are too many balls in the air at the moment. Current market intraday price actions indicate how nervous some investors are as the weekend approaches. Over the past few sessions the best of the forex market moves have occurred throughout the European session. Once the market opens stateside, investors’ interest seem to dry up. However, today’s U.S. durable goods number could cause a bit of a reaction, especially if it comes in below expectations.

Investors should be wary of headline news from the Eurogroup meeting in Latvia. The “he said, she said” headlines will have markets a tad jumpy. However, the general consensus is that the talks will not be yielding any major progress, but again end up attempting to kick the can further down the road.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell