After the Non-Farm Payrolls last Friday, the market chose to ignore the release and focus on the French Presidential elections. It is the only explanation for the U.S. dollar’s decline on such a good number. Both the actual NFP number and the unemployment rate were good enough reasons for the dollar to jump, not to decline.
Nevertheless, the market did exactly the opposite. The Macron/LePen duel in France was more important and traders didn’t want to carry much of a risk over the weekend. Considering that Forex brokers increased the margin over the weekend, it was only normal for positions to be closed.
A currency or a currency pair is also bought when traders reduce the exposure on short positions. In order to close a short position, or to square it, the effect on the market will be that the other currency is bought. Take the EURUSD pair for example: ahead of the French election final battle, traders chose to exit the short side. What is the effect on the EURUSD pair? It is bought as closing the shorts was bullish for the Euro.
Therefore, it is no wonder that the EURUSD ended at the highs of the week and EURJPY as well. With the exception of the EURGBP, all Euro pairs traded with a bid tone the entire last week.
After Macron’s victory was announced, the Euro gapped a bit higher and then it sold. Worries that the general elections will not allow a new government catch the Euro on the short side. However, I would say that is the Dollar, and not the Euro, for the drop in the pair as the U.S. dollar is in a bullish stance.
At the time of this writing, the USDJPY pair knocks at the 114 gate with no important economic releases on the day. The USDCHF is well above the parity level and threatens to extend the advance, while the EURUSD fell below the 1.09 mark. What next?
The main event of the week is the CPI or inflation on Friday in the United States. Market participants will focus on the Core CPI or the inflation number excluding energy and food prices. This is one is projected to be on the rise, and it should only fuel expectations that the Fed is raising the rates in June.
Speaking about the Fed and the June meeting, chances that we will see a rate hike are around 90% after last week’s FOMC statement. We all know that the interest rate differential is all that matters in FX trading. Therefore, extend for the U.S. dollar to extend its rally.