US Dollar – Is there any more room to rally?

US Dollar

Trading was extremely quiet yesterday as the US
markets remained closed for Presidents’ Day.  Although we ended last week with a
dose of positive US data, the greenback was either unchanged or weakened
slightly against every major currency pair except for the Japanese Yen.  Even
though yesterday’s holiday trading could be a good excuse for overall profit
taking, which would then explain the dollar’s move, the sell-off against the
Euro on Thursday and Friday in the context of stronger data suggests otherwise. 

The dollar’s lack of ability to continue the impressive rally
that we have seen since January 24th signals that the number of
buyers left in the market at this point may be limited.  There are only 3 major
pieces of US releases that we care about this week and those are the minutes
from the Jan 31 FOMC meeting due out tomorrow, the consumer price index on
Wednesday and Durable Goods on Friday.  With a stronger producer price figure
released last week, we are also looking for a strong rebound in consumer prices.
 Durable goods on the other hand are predicted to fall quite significantly due
to a pullback in aircraft orders after 2 strong months of orders.  

The minutes from Greenspan’s last Federal Reserve meeting
could garner a bit of interest if the former Fed Chairman left us with any
parting words of wisdom.  In all likelihood however, this week may very well be
another week of range trading for the dollar.  Last week’s strong US data
suggests that GDP growth should be particularly robust in the next quarter,
which would give the Federal Reserve a compelling reason to continue raising
interest rates.  On the other hand, the dollar’s rally does appear to be losing
steam from a sentiment and technical perspective which means that the two
factors could offset each other and keep tight range trading the predominant
theme.  Expect any continued sell-off in the dollar against the Euro and British
pound to meet resistance at the 1.20 and 1.75 levels respectively.  


The Euro ended the day virtually unchanged against the US dollar despite some
positive economic data and comments.  German producer prices for the month of
January jumped 1.2 percent to the highest levels in 24 years which is sure to
have raised inflation warning flags all over Europe.  Italian industrial orders
also rose significantly in the month of December.  Expected to grow by only 0.9
percent, orders actually jumped by 2.3 percent.  Sales on the other hand were
expected to be flat but actually increased by 3.0 percent.  For Italy, these
signs are encouraging as growth in Europe begins to pickup thanks to the
weakness of the Euro.  

ECB officials continue to be very hawkish.  ECB member
Liikanen echoed many of the recent comments that we have already heard on the
need for the central bank to be “vigilant” on inflation, especially now that
data has been improving.  ECB Weber also indicated that inflation risks
persist.  We see no clearer sign from the ECB than we have recently of their
intention to raise interest rates.  Meanwhile the economic calendar from Europe
is fairly heavy this week with French and German GDP due for release along with
more inflation data and consumer spending reports region wide, the Eurozone
trade balance and the German IFO survey of business sentiment.  

British Pound

After Thursday’s impressive recovery, the British pound continued to gain
strength against the US dollar today.  Economic data was mixed with public
finances dropping by GBP 21.1 billion, which was more than the markets -GBP 16
billion forecast.  This brought the country’s monthly budget number to a new
high of GBP15.3 billion.  However the BBA mortgage lending report indicated that
lending fell short of expectations by GBP 0.7 billion, illustrating slower
mortgage lending growth after a strong fourth quarter.  

Meanwhile in the week ahead, the market will be bracing itself
for the minutes from the last Bank of England meeting which is due out on
Wednesday.  Since sterling traders are primarily focused on whether the BoE will
leave interest rates unchanged for the remainder of the year or not, the BoE
minutes will be particularly telling since it will shed some light on where the
members of the policy committee stand and accordingly, how close we may be to
another rate cut.  The last time the minutes were released, the vote was 8-1 to
keep rates unchanged.  Right now, the forecasts are quite divided with some
analysts calling for a vote of 9-0 last month, while others are predicting a far
closer vote of 7-2 or tighter to keep interest rates unchanged.  

Japanese Yen

Unlike most of the other majors, the Japanese Yen continued to weaken against
the US dollar.  The Japanese economic calendar is very light this week with
nothing of extreme significance due for release.  The debate continues on
whether the Bank of Japan will be able to raise interest rates in the face of
sharp resistance from the Japanese government.  Most recently, the Bank of Japan
warned of volatility and unreliability in the GDP deflator as a measure of
inflation as compared to the consumer price index.  The Vice Finance Minister
however quickly swept in and assured the markets that deflation still persists.
 Ultimately, even if the BoJ was allowed the drop its quantitative easing
policy, an immediate rate hike is not necessarily a given.  The central bank may
choose instead to wait another month or two before actually raising rates to
give the market some time to price in the possible move.  Additionally, even if
the BoJ did raise rates, any move would probably be in no more than 25bp clips,
which still leaves Japan with one of the lowest interest rates in the world and
along with that USD/JPY as one of the most attractive carry trades in the world.

Kathy Lien

Kathy Lien is the Chief Currency
Strategist at

Forex Capital Markets
Kathy is responsible for providing research and analysis for

including technical and fundamental research reports, market commentaries and
trading strategies. A seasoned FX analyst and trader, prior to joining FXCM,
Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and
Foreign Exchange Trading.

Kathy has vast experience within the interbank
market using both technical and fundamental analysis to trade FX spot and
options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental