The US dollar is on a tear lower lately, especially against the Euro. The EURUSD pair managed to close the month of July above 1.18.
Such a move is even more surprising if one checks the interest rate differential between the two currencies. While the Fed started a tightening cycle, the ECB is not even close to one. As a matter of fact, the quantitative easing still runs in Europe. And, the interest rate is still in the negative territory.
Yet, the EURUSD pair moved higher. The catalyst for the move seems to have been the French elections, as the pair didn’t look back since. If you add to this the fact that it is quite expensive to be long Euro (negative swaps cost a lot of money, you get why retail traders are squeezed.
Important Week for the US Dollar
Yet, the whole move up on the EURUSD pair might just be a correction. Traders seemed to have been on the wrong side of the Euro, not the dollar.
If you look at other currency pairs, the move is not confirmed. The USDCHF had an excellent month in July, for example.
Moving forward, the week is packed with economic data. Plus, considering it is the start of a new trading month, traders must be cautious when positioning.
Non-Farm Payrolls (NFP) in the United States on Friday will set the tone for the rest of the trading month. All eyes will be on the consistency of the US data.
Later in the trading month, the Jackson Hole symposium will steel trader’s attention. The focus will be on Draghi’s speech, as he’s expected to deliver one.
US Equities Marching Higher
On top of everything mentioned above, a strange thing happened lately: the USDJPY and the DJIA decoupled. It is a known fact that the two enjoy a direct correlation.
Traders buy US stocks borrowing in JPY, as the interest rate is ultra-low. This drives USDJPY higher when DJIA jumps. Not this time.
While the US Presidential Election’s initial reaction was similar on both pairs, the last months saw it break. Is this just a lagging situation, or is for real?
Summer trading proved to be not that boring after all. That is, if you bought the Euro, as the theme was a higher Euro across the board. But, as long as the interest rate differential shows the same gap, expect the dollar to fight back strongly.