Is The Big U.S. Dollar Rally Sustainable?

by: FXstreet

Now that the last month, trimester and semester have been left behind, it is safe to say that the best performer over the first half of 2013 has been, without dispute, the US Dollar, with the trending word 'Septaper' as the main catalyst having triggered all this wildness of volatility.

Is the big USD rally here to stay? Does it have legs to go?

In order to further assist market players on their positioning for what may represent a cyclical change in monetary policy by the Fed, this week's economic reports out of the U.S. will be again critical, including manufacturing and non-manufacturing ISM and the jobs data on Friday. Kathy Lien, Founder at BK Asset Management, reminds us that "The closer the unemployment rate gets to the 7% mentioned, the greater the likelihood of a reduction in stimulus in September instead of December."

Last week, several voting members of the FOMC emboldened the US Dollar to fresh highs. One speaker in particular, that is, Fed Governor Jeremy Stein, set a strong buying tone on the Greenback before the end of the week, saying that:

"The best approach is for the committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting..."

Lien agrees September "is likely because the central bank will not want to suddenly reduce stimulus right before the holidays," adding that "While we have already seen the dollar trade higher on liquidation of dollar funded carry trades and re-pricing of FOMC expectations, there's scope for further gains on next week's economic reports." Contributor and CEO at GlobalFX, Greg McKenna, supports Lien's view, saying:

"I am now convinced we are but a couple of months away from the Septaper following last Friday's comments by Mr. Stein, who rounded back to the key point of this communication strategy which is of course to get the market ready for the taper but all the while explaining that they still have the flexibility to increase purchases if needed and they are not raising rates anytime soon."

One more takeaway from last week was the failed attempts by FOMC voters to downplay an early taper, suggestive of the well-defined bias the market has adopted.

Outlook for the EUR/USD in the week ahead

Giving his take on the US Dollar, Sean Lee, Founder at FXWW, notes how the currency "was driven by significant month-end flows from US corporates and asset managers." Lee brings up an interesting observation about most of the big-bank research over the weekend having turned very bullish on the USD. However, Lee feels that this may be a bit premature, saying that "whilst the overbought AUD and JPY have undergone major readjustments against the USD, none of the other majors are showing strong trending signals and still seem to be in sideways trading modes."

Marc Chandler, Global Head of Currency Strategy at BBH, gave his technical perspective on the EUR/USD, noting that the close below the 200-day average ($1.3075) for the third consecutive session should allow now a test of $1.2850.

In our weekly Experts Forecast Currencies Poll, the sentiment towards the USD remains bullish overall, yet against the EUR, the short-term view is skewed towards 'sideways' movement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.