The direction of the dollar

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Lately, it seems that wherever forex is mentioned, it’s accompanied by some mention of inflation as well. In the last week of June, the head of the Bank for International Settlements (BIS) Augustin Carstens, speaking about a key dynamic in the world of forex trading, said that there was a possibility that inflation might be tamed without a huge effect on the economy, meaning “…an impact on GDP but not going all the way to a recession”.

This would not be a simple matter because chairman of the US Federal Reserve Jerome Powell admitted the previous week that the task would be “very challenging”. Still, Powell confirmed the Fed’s commitment to controlling inflation was “unconditional”.

The third week of the month saw the first depreciation of the US dollar since June began, and this came off the back of dropping commodity prices including oil.

The result of this was to relieve traders’ fears of inflation so that stocks generally appreciated, which drew away from the dollar’s safe haven appeal. “Falling commodity prices could help pull headline inflation prints downward… reducing the need for aggressive monetary tightening”, explained Karl Schamotta of Corpay. The fact that new home sales in the US rose also pushed the USD down, although, by June 24th, the dollar remained 9% up for the year so far. Let’s take a trip around the world for more forex trading news about the USD and how it has recently been faring against its main competitors.

EUR/USD
Going into June, EUR prices were lagging against the dollar but the new month brought a recovery of 0.48% to the euro zone currency due to data that indicated US job creation was going at a slow rate. Public sector employment in the USA increased by only 128,000 in May, falling short of an expected 299,000. This showed the economy may be slowing down, which could be the reason interest rate hiking would ease. EUR/USD was holding at 1.0703 on June 2nd. Mid-month, fundamental economic data was looking more solid in the US than in Europe, and the EUR/USD was at $1.04. “In our view, the question of parity is more of a ‘when’ than an ‘if’”, said Erik Nelson of Wells Fargo, who estimated parity could be reached within one month due to the high US interest rates. The surge in equities coming up to the last week of June brought EUR prices up 0.3% to $1,0553.

The photo has been used for illustrative purposes.

USD/JPY
On June 6th, the Japanese yen was down 0.8% to leave USD/JPY at 132.96, a low point last touched in 2002. “The Bank of Japan is now the only central bank among developed nations which isn’t tightening monetary policy… leaving the yen as the only loser”, said Takuya Kanda of Gaitame.com Research Institute.

The dovishness of Japan’s central bank had led to a series of drops for the yen against the dollar for the first half of the year. Another factor keeping the yen low was the recent hike in oil prices, as Japan is a big importer of energy. Elections were pending in Japan in a matter of months and the government was feeling pressure from consumers and businesses to deal with rising prices, but Bank of Japan (BOJ) Governor Haruhiko Kuroda was unmoved, insisting that wage growth would have to improve before interest rates could be raised. This statement itself sparked off more selling of the yen. As long as the US Federal Reserve remained hawkish and the BOJ dovish, “The yen should keep weakening” against the American currency, in the opinion of Brendan Mckenna of Wells Fargo.

GBP/USD
The fall in commodity prices going into the last week of June, which reduced the dollar’s appeal, pushed GBP/USD up to its highest in a week at 1.2300 on June 27th. Risk sentiment in world markets was also fair-to-good, which pushed down the dollar and supported the pair. Expectations near the end of June were that the Bank of England would hike rates slowly, so traders were not as bullish about the pound as they might have been.

In addition, the disagreement between the UK and the EU about the Northern Ireland Protocol of the Brexit agreement kept GBP/USD from extending its gains, however the situation still remains in limbo, sparking the possibility for further volatility from this top forex trading pair.

Wrapping Up
Readers with an eye on forex trading in weeks to come will be keeping up with European Central Bank policy and EUR prices, as well as all the news about the USD, including statements of US Federal Reserve policy and economic data in the USA. Should the Fed have difficulty keeping costs down while also protecting the economy, “The Fed would likely have to change course and start to slash rates”, in the opinion of Joe Manimbo of Western Union Business Solutions. The forex trading markets are as rife with volatility as ever, giving forex traders a bumper crop of opportunities and risks.