Just another opportunity to purchase the USD in dips

After an incredible run of form that has seen the USD stretch to multi-year highs, the Greenback is showing some signs of softness. US retail sales have once again disappointed and questions are now being asked regarding how it is even possible that after so much progress on the employment front and consumer confidence readings reaching yearly highs, that consumers are still not spending. This data is not going to alert the USD bears to come out of the woods by any means, but it is hardly going to encourage hawkish language from the Federal Reserve either.

Looking away from the disappointing retail sales, the complete divergence in economic sentiment and monetary policy between the United States and everywhere else is at eye-catching levels, and the USD softness is just providing an opportunity for traders to potentially buy the currency in dips. There is an old saying that “the trend is your friend” and there is no doubt that the trend is fully behind the USD right now. Due to the divergence mentioned above ever widening, the trend will remain this way and the USD will also remain supported. The only factor that could put this at risk is if the Federal Reserve swerved away from its commitment to raise US interest rates and quite simply, there is very little chance of this happening.

The brutal punishment that the EURUSD has been under has taken a pause following hitting the 12-year low at 1.0492 earlier in trading. Technically speaking, the EURUSD is still vulnerable to further declines looking forward and it was mentioned yesterday that small bullish swings higher was seen as a potential option for investors to sell on rallies. The economic outlook for Europe is just so bleak and the ECB entering a new era of monetary easing even by its own ultra-loose standard means that the EURUSD decline to parity is appearing inevitable and likely to happen much sooner than anyone envisaged. The ECB actually launching QE just provides the markets with a further reason to expect continued currency weakness, meaning that the pair is probably going to sink below parity. The lowest low for the pair can be found at around 0.8225 and as steep as a drop as this sounds, my attitude towards whether it can happen is “never say never”.

After falling to a four-month low at $1157, Gold is attempting to consolidate around the $1160 region today. Following a heavy fall since the beginning of the month, Gold volatility could be set to quieten for a while. The next substantial USD move will be highly influential in which direction Gold trades and with the Federal Reserve not in a hurry to begin raising US interest rates – I do not think that this is the decline in Gold that everyone has been talking about for a long time and I am not ruling out a swing higher up the charts. When US interest rate expectations really hit fever pitch, this is when the longer-term bearish forecasts for metals will be underpinned.

Although all eyes and headlines are focused on the dramatic decline in the Eurodollar, the Cable has also participated in its own downward spiral. The GBPUSD has nosedived from 1.52 to a new 18-month low at 1.4892 within a week and with the UK election looming in May, I really do not think this pair has found a bottom. To be honest, if the unexpected volatility encountered during the Scottish Referendum last September strikes twice – a move to the low 1.40’s for the GBPUSD will potentially be on the cards.

The USDCHF bullish momentum has taken a bit of a breather with the pair consolidating around parity today. However, this doesn’t change the fact that the pair reached parity far sooner than expected, and anyone who purchased the pair after the shock from the Swiss National Bank (SNB) two months ago has basically gained huge money. The decision from the SNB was never positive for the CHF and it was always expected that it would reverse gains, although I expected this to occur in around six months and not just two. The CHF weakness has really accelerated within the past week and while I understand that GDP was ignored because future data will be at risk to the stronger CHF, and despite recent comments from Thomas Jordan, chairman of the Swiss National Bank, that the currency was “clearly overvalued” inspired monetary easing talk – I remain suspicious that a new minimum exchange rate against the Euro has discreetly been set.

Elsewhere, the NZDUSD wins the award for “surprise mover” after the Kiwi jumped from a four-year low at 0.7189 to 0.7427. It came as no surprise to anyone that the overnight Reserve Bank of New Zealand (RBNZ) statement expressed that the NZD remained overvalued, but you just need to take a simple glance at the charts to see that traders completely ignored this. The Hong Kong Dollar weakened to a three-year low against the US Dollar with the USDHKD reaching 7.7742. Finally, the CNY has continued to strengthen away from its two-year low after the People’s Bank of China (PBoC) unleashed even more monetary stimulus, meaning that perhaps the CNY weakness has been priced into the markets for now.

Follow Jameel on Twitter @Jameel_FXTM

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