EUR/USD at Fresh Yearly Highs Sinks DXY Index to New Lows
- EUR/USD has cleared May 8 key reversal, further gains may carry it into 1.1135 in the near-term.
-US Dollar not really struggling elsewhere; AUD/USD remains fertile ground for further losses as base metals remain pressured.
- Greenback positioning among retail crowd remains largely mixed: net-short EUR/USD, USD/JPY, and GBP/USD; and net-long AUD/USD.
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The DXY Index's spill the past few days can be attributed to two factors. First, evidence that the US economy isn't rebounding at the start of Q2'17 after a dismal Q1 GDP reading has tempered market optimism for a June rate, with Fed funds futures markets no longer pricing in a 100% probability of a move; the April US Advance Retail Sales and Consumer Price Index reports on Friday were the catalysts.
Second, the surge in the Euro, the largest constituent of the DXY Index at 57.6%, has also been to blame. The Euro has benefited from further signs of economic strength in the region, including the +1.7% preliminary Q1'17 GDP reading today. On top of that, comments from ECB officials have indicated nothing short of the ECB starting to prepare the markets for a reducation in its extraordinary easing measures.
Yet there is now a third factor creeping into the picture, which traders are slowly realizing: hopes for fiscal reform, which in turn would drive inflation expectations higher and force the Federal Reserve to accelerate its rate hike timeline, are fading quickly. While there isn't a direct connection between the recent newsflow about the Trump administration and FX markets, there is an overaching concept that binds the two: time is a finite resource. More time spent by the Trump administration fighting the media or putting out self-induced controversies means less time spent working on legislation, nevermind the fact that these self-induced controversies mean that bipartisan support for passing legislation is all but dead.
While there are some data due out this morning that will offer more insight into the US economy, of the housing variety, it seems like secondary information at present time as everyone remains highly fixated on the newsflow out of the White House. With a US economic calendar that is notably absent of 'high' rated events this week, the cloud of doubt over Washington seems poised to envelop the US Dollar for the foreseeable future.
See the above video for technical considerations in EUR/USD, EUR/JPY, EUR/AUD, AUD/USD, USD/JPY, GBP/USD, and DXY Index.
Read more: FX Week Ahead: US Political Risk Rising, UK CPI, EZ GDP, Aussie Jobs
--- Written by Christopher Vecchio, Senior Currency Strategist
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