For a little over a year now the US Dollar has been on a path of price destruction and the Euro has increased upwards of 15%. This all seems to be counterintuitive, with the United States continuing to increase rates and the European Union still unable to discuss any rate hikes. One thing to remember is that all markets anticipate the future and price it in well ahead of time. Traditionally currency moves tend to reflect interest rate differentials, but with the world anticipating the changes in central bank policy to come, these correlations are not holding to tradition. As we speak, things appear to be dead in the water as speculators and other players decide on what else is to come and how these things will affect the markets.
One large piece for the US Dollar right now that people are considering is the fact that Donald Trump is not turning out to be the spendthrift Republican that people had believed he might be. The federal budget that he recently came out with is enormous. The proposed budget would add almost $1 trillion to the federal deficit over the course of the year, and it will cut spending on many domestic programs such as Medicare and increase military spending. In addition to all of this the new Fed chair will be testifying in front of Congress this week, speculators will get their first good taste of the type of chair he will be over the years to come. Personal politics aside, the budget will have a hard time being passed as is. All of that said, now that the FOMC is in a tightening cycle that has more or less been priced into the US Dollar already, things like current account balances and federal spending weigh on pricing more than rate differentials. Bloated budgets and decreased exports lead people in the debt industry to believe that a country is closer to a recession time than not. This pushes further dated rates down and gives less confidence in the currency status of a said country. In the case of the US Dollar, it is at more or less a political crossroad. If the bloated budget is passed, this will point to further increases in the future and push the US Dollar further into oblivion. If not, then the US Dollar has a chance at somewhat of a recovery to some sideways action over the coming months. Even with sideways action, a drop into the $85.50 area for the DX is not unrealistic.
Chart created on Investing.com
Chart wise, the last few weeks, the US Dollar has been moving sideways, we have a double bottom around $88.25, and many technicians predicted a rise back into the low $90s. This has not yet happened, and it is easy to see why with overall sentiment so grim. I honestly would not be at all surprised to see the US Dollar fall back to pre-taper tantrum prices under $80. It is important to not become complacent at this point since there are so many people expecting a move like this; which brings us to the Euro.
Chart created onTradingview.com
Overall data for the European Union has been good for the last six months or so. They are showing recovery, and the Euro is experiencing its own taper tantrum at the moment. The only issue with this is that, while there have been rumors of rate hike talk, there have not been any official reports that the ECB is considering rate hikes at this time. Analysts and long-term interest rates show that speculators are looking for the ECB to start hiking rates around the end of 2018, or early 2019. The ECB has reported that they are beginning to cut QE. The only thing standing in the way of further upside for the Euro is bad data. If Germany or the European Union start getting lower than expected CPI, PMI, account balance and retail sales numbers for a few consecutive months, that will take the wind out of the Euro’s sails pretty quick. So, it is safe to assume that the recent up thrust was due to taper and hike talks along with that being backed up by better than expected data.
Watching the currency markets and assessing data the European Union has been lagging the US by about a year. This time last year, US data started to turn a bit for the worse and speculators doubted every hike that the FOMC announced. The FOMC hiked, and still, speculators believed they would have to reverse their decision in the near term due to a recession. The US has thus far been resilient to this assumed recession, but the point here is that I expect data from the European Union to head a bit south over the coming months. This will not likely push the Euro back to the lows of 2016, but it should cause prices to move sideways to down for a bit. This will do the opposite for the US Dollar and could stand to get speculator confused as to what to do next as far as their positioning. In these situations, people usually hold until prices move again one way or the other, hence the sideways assessment.
Chart created on Tradingview.com
If we look at the gold chart for some help here with direction, it is not giving much of a signal either. There is not really any RSI/price divergence and prices are sitting up as highs rejected multiple times since 2016. This week, the week starting Sunday, Feb 25th will be pretty big for data, we have US NFP, US GDP, German Unemployment, Powell testimony in front of Congress, EU CPI and EU unemployment. It is possible the tone for the next coming months will be set over the coming week.
Overall, I see the two currencies at a decision-making point, I am not sure how long that will last, but there is a possibility, it could be for an extended amount of time, such as when the ECB finally does announce the first rate hike. It will be essential at this juncture to keep an eye on European data. If European data takes a turn for the worse and rate hikes fall back into question a significant move to the downside in the EUR/USD becomes more of a possibility.
Personally, I do not think the market has reached a point where the US Dollar is poised for a big up move, but as we all know, anything can happen. No matter who you are, bull or a bear, it is important always to have an exit strategy on hand. Usually, the best way to handle sideways markets is to stay on the sidelines or find something else to trade. If you must play them identify areas of supply and demand, then place trades accordingly.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.