The U.S. Dollar index is at eight months high and things are looking to go in the same direction from this moment on. This should be the case at least if we’re considering the fundamental factors ahead of us for the rest of the year: U.S. presidential election, Fed and ECB meetings.
The U.S. presidential election seems to be priced in the market at this moment, with a real shock for the equity markets to come only in the case Trump wins. In case Hillary wins, it is expected for the actual result to be a non-event, at least when it comes to the forex markets.
Coming back to the two central banks mentioned at the start of this article, the Fed in the United States is expecting to hike the rates by the end of this year and, with two meetings ahead of us (November and December), the odds are that a rate hike will be delivered in December. This should be viewed as hawkish for the dollar, and the way the market is trading lately, it is.
The ECB (European Central Bank) last week made it clear that it is ready to easy monetary conditions even further, no matter what economic releases will come in the meantime. The timetable for the new move seems to be at the next meeting in the early December.
Therefore, we have the two powerhouses in the central banking global arena, that are moving in opposite directions, or diverging in their monetary policy, and this could only add fuel to a U.S. dollar fire rally. The most obvious loser in this scenario will be the EURUSD pair.
In a way, it is already showing this divergence in the sense that the market is selling the pair that now trades below 1.09. It doesn’t matter that earlier this week the PMI’s (Purchasing Manager Index) came at 2016 highs, that IFO in Germany is showing a great recovery…. all these are overshadowed by the monetary policy in the Euro area.
The U.S. dollar index is not being made up only by the EURUSD pair though, but the picture looks overall the same in other currency pairs as well: the USDCHF pair is struggling to get back above parity, the USDCAD pair is being bought on every dip and the AUDUSD is not able to move above 0.7750.
Speaking of the commodity currency pairs, I am favoring a move higher in both the CAD and AUD pairs, and this might be the trigger for an overall reversal in the U.S. dollar index as well. However, until the U.S. elections are behind us, chances are the market is going to move the same way it did so far this week.