Market analysis: US dollar likely to stay weaker – for now

The weakness in the US dollar persisted throughout last month amid a “bad news is good news” theme. And that weakness is likely to continue in the short term if the data that emerges from the US indicates any weakness in the economy.

Commodities and currency majors soared to multi-month highs against the dollar as a slew of key US economic data dampened expectations of future Federal Reserve action on raising interest rates.

There was little to no signs of growth across all sectors of the US economy – housing data showed drops in new home sales, manufacturing activity contracted on the East Coast and overall demand was anaemic – durable goods orders dropped to 0.8 per cent compared with expectations of 1.9 per cent (previous reading was minus 3 per cent), while consumer confidence slipped to 94.2 versus expectations of 96.0 (96.2 previous).

The bad run of data from the US was summed up in the headline US annualised GDP figure for the first quarter, which came in at 0.5 per cent. It was the lowest since the first quarter of 2014.

Following the slew of weaker numbers, the US dollar weakened to multi-month lows. The US Dollar Index, a measure of the dollar’s value against a basket of the world’s major currencies, dropped more than 1.5 per cent, snapping through a key support level of 93.60 to establish a new eight-month low at 92.80 levels.

As a result of the bearish dollar, currency majors turned in strong gains through the later part of last month. The euro pared most of its losses from early in the month to trade near six-month highs at 1.15, while the British pound appreciated by 1.7 per cent, after finding stiff resistance at this year’s highs of 1.4670.

Commodities also turned in strong gains. Crude prices gained more than 5 per cent on the month to move to six-month highs above 45.50, while gold approached this year’s highs at US$1,300.

Amid the slowing run of US data, the Fed convened its meeting for last month and as expected held rates unchanged. During its most recent meeting, the Federal Open Market Committee downgraded the assessment of US economic activity – which “appears to have slowed” while inflation expectations “remain low.”

In the past few decisions, the Fed noted “global economic and financial developments would continue to pose risks”. However, the omission of this during last month’s meeting indicated that the US central bank believes volatility in global financial markets will have reducing impacts on the US economy.

This in turn ramps up the focus on the two key figures – US jobs and price growth – in determining if the Fed can justify a rate hike at its next meeting in June.

This Friday’s US non-farm payrolls report is expected to show another gain of 200,000 with no changes expected in the unemployment rate of 5 per cent.

A reading of 200,000 would be in line with the monthly average so far his year and a reading above 250,000 jobs will lend support to the dollar as a result of returning expectations of a possible Fed hike in June.

We expect the figure to come in between 200,000 and 220,000 – after an increase during the early part of last month, weekly jobless claims data has fallen to lows for the year – and this could improve prospects for a stronger-than-expected US jobs print on Friday.

We will expect weakness to continue in the greenback in the short term. Following the slide over the course of the past two weeks, strong support in the Dollar Index falls at 92.50. A weaker-than-expected jobs report of less than 200,000 could result in a decent test of this level with upsides capped at 95.20 levels. The euro will continue to find support on the back of a weaker dollar – with the next upside resistance falling at 1.1710 levels.

Gaurav Kashyap is the head of futures at AxiTrader ME.

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