USD Recovers After Sell Off Sucker Punch Awaits Data and Fed Members

In the current global growth slow down environment the US continues to be the brightest light. The market found out what happens when that light dims slightly. There was an expectation that the US Retail numbers published yesterday where going to come in lower, and indeed they did. The global markets fired off a sell off that put all major indices in red and saw the USD lose against all major pairs. The USD started to recover in the Asian market open and has now advanced against 31 major pairs ahead of the US Industrial Production numbers later this morning.

Complicating matters for the USD is the fact that today two Federal Reserve members will speak. Plosser and Kocherlakota will take the stage at two different events but given they are on opposite sides of the hawk/dove spectrum their comments could net each other out or spark a major move in either direction. The global market turmoil is great example of the fragility of market conditions and could further delay the much awaited exit plans from the Fed and further down the line the Bank of England.

FX volatility was the highest since February 6 as measured by JP Morgan Chase. It touched 8.20% yesterday. For comparison the lowest on record was this year in July with a reading of 5.29%. Morgan Stanley maintains its forecast of the EUR/USD at the end of the year when the pair will end at $1.2400. Interest rate divergence as the Fed is moving forward, albeit slowly, towards raising rates versus the ECB who has to come up with a way to stimulate an economy sick with deflation justifies those forecasts.

Uncertainty about the US recovery is the most damaging to the dollar as witnessed by the damage done by the retail sales figures. The effect of bad data on interest rate expectation had some analyst pushing back their timeline of the Fed’s rate hike to 2016.

The JPY continues to appreciates versus the dollar as it is now below 106 at a monthly high given the fact that the Japanese currency has been gained strength due to safe haven flows. Currently it sits close to a strong support level of 104.50 where buy orders might be trigged given investors also anticipate further action from the Bank of Japan not only to insure the currency doesn’t damage exporters, but it could reignite deflation fears if the trend continues.

Commodities continue on a downward trend wight he exception of Gold that has been boosted as a safe haven destination by investors. Weak global demand and excess supply have hit the energy markets with crude at $82.7. Gold continues to target the monthly high of $1,249 and now sits $10 below at $1,239.60 an ounce.

Upcoming events:

USD Industrial Production
USD FOMC Member Plosser Speaks
USD Unemployment Claims
USD FOMC Member Kocherlakota Speaks
CFD Crude Oil Inventories

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza