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Dollar Tanks Post NFPs - Time to Buy or Sell?

  • Kathy Lien
  • 4 May 2019

Daily FX Market Roundup May 3, 2019

 

On Friday the US dollar turned lower despite good labor market numbers and the move led investors to wonder if the greenback peaked, paving the way for bottom in euro, sterling and other major currencies.On a fundamental basis, the US dollar should be attractive because the US economy is outperforming its peers and the Fed is more hawkish than other central banks but technically, having fallen to multi-month lows, EUR and AUD are vulnerable to a further short squeeze that could take these and other currencies higher. Even though the greenback fell after Friday's labor market report, job growth exceeded expectations and the unemployment rate fell to a 49 year low. Non-farm payrolls increased by 263K in April, up from 189K the previous month and the jobless rate dropped to 3.6%. The dollar fell because wage growth rose less than expected but last month's release was revised higher and year over year, earnings growth is just below the cyclical high. So what this data tells us is that the labor market is tight and finding work is easy but salary gains are limited and American pocketbooks aren't swelling.

 

Nonetheless Fed Chairman Powell's optimism should not be underestimated.At this week's FOMC meeting, he said solid fundamentals are supporting the economy as it continues on a healthy path. He dismissed talk of easing, described the Fed's policy stance as "appropriate right now" and said "we don't see a strong case for moving in either direction." While the FOMC statement focused on the negatives like low inflation, weaker consumer spending and business investment, Powell downplayed all of these concerns. He acknowledged that inflation has been weaker, but attributed the softness to transitory factors. He also said consumer spending and business investment will most likely pick up and noted that some of the risks they were worried about in March (such as Brexit, Europe and China) have "moderated." These upbeat comments kicked off a dollar rally so strong that it drove EUR/USD below 1.12 and AUD/USD below 70 cents. While that rally fizzled on NFPs, we believe the dollar remains a buy for 2 main reasons - first the Fed chair made it very clear that when it comes to the economy he sees the glass half full. He expects the outlook to improve as the prior weakness eases. Secondly, he sees no reason to be talking about rate cuts.   This view contrasts sharply with other central banks that have recently expressed concerns about growth and talked openly about the possibility of a response to counter that trend. Economic and monetary policy divergences were the reasons for the dollar's strong gains in April and they should continue to be a source of demand for the greenback.  CPI and PPI are scheduled for release this week and with gas prices rising to their highest level since October, the risk is to the upside for these upcoming inflation reports.

 

Yet when it comes to trading currencies, sentiment and technicals are just as important. USD/JPY has not closed above the 20-day SMA since April 25th and EUR/USD found support above 1.11.We could see further profit taking on long dollar positions before buyers come in again. The next support level for USD/JPY is 110.50 and resistance in EUR/USD is near 1.1270. The dollar is a buy but it may pay to wait.

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.