- The Dollar's reversal has gained further technical ground, but the fundamental fuel is still not clear
- US indices continued to spin their wheels despite improved tariff and Iran news, can Apple prove the game changer?
- Scheduled event risk is heavy over the coming session from Chinese PMIs to Eurozone GDP to the FOMC rate decision
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Dollar Continues its Climb Though Motivation is Still Unclear
There are many possible sources of strength for the Dollar to draw from in its impressive recovery over the past few weeks. We may see an appreciation for economic activity, improved outlook for political stability or a return of focus back on monetary policy. A simple effort to rebalance stretched assets - an overly bearish dollar or bullish Pound via measures like speculative futures positioning for example - may also be at the root of the Greenback's recovery effort. Yet, whatever is carrying the benchmark currency, the intent is undeniable. Progress is progress as they say, but finding a common thread or even a reliable confluence of a few drivers is important to establishing a meaningful level of conviction in the market and its move. For me, the discount afforded by the net short position in the Dollar coupled with the much more favorable fundamental backdrop is enough to give me some confidence in passive rebalancing. I have taken a small EUR/USD short with a wide stop to which I will build up if the drive grows more transparent and robust. There have been plenty of other technical moves of consequence - GBP/USD, USD/JPY, AUD/USD, NZD/USD, etc - but chose the best option for a scenario where we coast rather than which looks the best technically should the Dollar find a definitive and all-consuming rally.
Headlines, Traditional Data and a FOMC Rate Decision
Looking for fundamental footholds for the Greenback over the last and next 24 hours, there are a few highlights of dubious consequence. In terms of economic data Tuesday, the top traditional economic data release was the ISM manufacturing activity report. Relative to the service sector, this is a much smaller source of GDP and jobs; but political focus has made it the focal point of aggressive policies that have led to the trade war we are currently building. Despite the threat of tariffs and efforts at negotiations with trade partners along with favorable business environment policy changes, the industry survey dropped for the fourth consecutive month. Not encouraging. As for headlines, news that US President Trump has deferred the onset of the metals tariffs another month and suggestion that the US is open to negotiation to Iran warms trade and heartens the Dollar's position in the web - though that has been an abstract risk, so it will be equally trepid as a booster. Monetary policy advantage is one of the deepest wells of enthusiasm from the bulls. Relative to rate forecast, the currency has gone far off course. If this is indeed the most capable driver, expect the FOMC rate decision Wednesday to play a more significant lever for the Greenback.
Is Apple's Earnings the Key to Triggering Lost Speculative Enthusiasm
Risk trends were still struggling to gain serious traction - whether bullish or bearish - this past session. The headlines relating the US President's decision to push back the onerous steel and aluminum tariffs on trade partners to June 1 as well as the suggestion that the Iran deal is not explicitly on course to be canceled eased concerns enough not to catalyze into a political risk-driven collapse. That said, it wouldn't offer a clear charge for bull to foster a recovery. The S&P 500 and Dow opened the trading day with its first bearish gap in seven trading sessions, though the losses that followed the opening maneuver were largely retraced through the close. That did little to establish any clear trend. Perhaps the Apple earnings that crossed the wires after the bell Tuesday with the customary beat will encourage optimism where the Facebook, Amazon, Netflix and Google data could not? I remain skeptical. And, this isn't just reticence in conviction for US shares. Looking at other risk-related assets, we find the same uncertainty. For the outperforming measures like the FTSE 100 and DAX, adjusting for the currency declines puts them in a far less glamorous light.
Don't Forget the Other Fundamentally Loaded Currenies
It is difficult to find anything with greater market-moving potential than the themes of broad risk trends or the distortionary influences of global monetary policy. However, there are other possible drivers and primed markets out there. While the EUR/USD is being drug lower by the Dollar's strength, the Euro can fuel this fire owing to its fundamentally stretched position. The EU-US relationship is still on the rocks, but we may simply focus on growth and monetary policy with the Eurozone GDP and CPI figures due over the next 48 hours. The Pound has been sunk by growing awareness of the troubled Brexit backdrop while the fading BoE rate forecast adds further sensitivity for disappointments like the manufacturing PMI to exert pressure. There is also the Australian and New Zealand Dollars. The former was undermined by weak data from manufacturing activity to housing and commodity inflation. The RBA rate decision offered the customary neutral stance. Despite the unflattering backdrop, the AUD is arguably oversold short-term. As for the NZD/USD, the tumble over the past two weeks is the most intense in over two years. Without clear fundamental pressure - certainly not to this intensity - the currency is aggressively stretched. We discuss all of these unfolding themes and opportunity in today's Trading Video.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.