Currency markets update

The USD struggled to find direction early on Thursday but pushed significantly higher against its trading partners later in trading. Durable goods in January climbed much higher than expected, which provided comfort to traders that the US economy is continuing to make progress. Another contributor behind the prevailing support for the USD is that Federal Reserve Chairwoman Janet Yellen told the USD bulls what they needed to hear during her testimony to Congress, with this being confirmation that the FOMC will still be raising US interest rates this year. It might not occur as soon as the USD bulls would prefer, but knowing it is going to happen at some point is keeping the USD supported.

The event risk for the USD to conclude the week is the second GDP estimate on Friday afternoon, with most forecasts expecting the GDP to be revised lower from 2.6% to 2%. As long as the GDP estimate doesn’t push back interest rate expectations until the last one or two months of the year, I can see the USD uptrend remaining intact.

The EURUSD finally caved into its triangle pattern on the Daily timeframe and dropped by over 100 pips to pull all the way back to 1.1209. The uncertainty in Greece has hopefully drawn to at least a temporary conclusion and this is allowing traders to pay attention to the painful EU economic performances, with the EURUSD suffering additional pressure when the USD rallies. The divergence in economic sentiment and monetary policy between Europe and the United States is still a widening tunnel, which has widened even further this week in my opinion. The USD will remain supported for as long as there are expectations for the Federal Reserve to raise US interest rates, while it was announced earlier this week that Eurozone inflation had fallen to its lowest levels on record. Anxiety is heightening that Europe will slip into a deflation battle, illustrating exactly why the ECB had to finally pull out the QE card.

There was some cheer over ECB President Mario Draghi saying that he is seeing signs of increased confidence in Europe, but confidence increasing and consumers becoming confident enough to actually begin to spend and pick up inflation levels, are two completely different matters. At the end of the day, it will take a long time for the EU’s economic fortunes to reverse and traders are going to be really hesitant to purchase a currency that belongs to an economy entering deflation. The USD is going to continue its rally as the timing of an interest rate hike approaches, meaning those calls for the EURUSD to sink to parity this year are still on the table.

Speaking of divergence in sentiment, there is one very strong example confronting traders and that is the EURGBP. The pair dropped to another seven-year low at 0.7269 in trading on Thursday and will probably find some support around the 0.7240 area. From here it has to be said that because Bank of England (BoE) Governor Carney is appearing at ease with unexpected UK inflation risks and very little positive news coming out of the EU economy, the EURGBP looks set for a longer-term downside move towards 0.70. The GBPUSD pulled back from a one-month high at 1.5537 to trade around 1.5430 with the USD strength being the major contributor behind the momentum shift. Now that the GBPUSD has pretty much recovered its sudden losses from early January, I prefer its chances of trading sideways than I do of surpassing 1.55.

Follow Jameel on Twitter @Jameel_FXTM

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