The dollar continues to dominate against the euro and the pound, as EUR/USD broke important 1.39 and GBP/USD is trading below 1.59 at time of writing. The market participants came back from the weekend, feeling a bit more positive about the economic outlook ,after Fridays payroll data showed an improved number which helped the dollar on its upside journey. The fundamentals are starting to matter again and traders bought the dollar as an aftermath of better than expected economic data.
The EUR/USD continued to slide and the pair did not even stop at important 1.3930 but broke on the downside after the market open. Next support level lies at 1.38 ahead of 1.3760. The pair needs to keep those levels in tact for any recovery hope, however clear break of 1.38 may indicate that the euro could fall even more in the coming days. As long as the pair keeps 1.40 untouched, the downside may prevail.
The GBP/USD is trading lower again not only due to dollar strength but the pound has its own drama to deal with, as UK government is having a crisis and the Prime Minister€™s future looks gloomy at best. Gordon Brown has refused to step down, after ministers asked for his resignation and the fact that this has been even discussed as an option makes the pound weak and investors not willing to buy it before the picture is clearer . The political instability in UK weighs on the country€™s economic outlook and all the positive sentiment that traders had in previous weeks, seem to be fading away. The next few days will be crucial for the currency and the country€™s outlook and GBP/USD needs to keep 1.5760 for now if further upside is to be seen.
The economic calendar is almost empty today, with no economic data out of US and a few numbers out of Euro zone which showed an improved economic sentiment in Europe but not enough to swift the current negative euro direction. The dollar strength can be seen as a pure correction of all those negative days we had in previous weeks, however hints that FED may increase its rates in the coming months, gives investors more reasons to buy the currency. After many months of almost zero rates, there are signs that inflation may be coming back and the recovery may be in motion, so therefore FED may be called to re think its low rate monetary policy. Traders have started to speculate that the bank may start to hike its rates from the September meeting, however let€™s not jump into conclusions until we see more economic data out of US.
Many economists and analysts across the globe have dismissed the recent recovery trend that the US government is trying to promote and instead are seeing this recent rally in stocks and equities as a simple correction before another wave down. The truth is that the recession is still a reality and it will take more than a few €œgreen shoots€ in the current economic environment in order to talk about a true recovery. The markets are still confused as to which direction to take and always risk aversion comes back when another headline or news disappoint.
Let€™s see how this week progress form here and how the other markets like commodities, metals and stocks will react€¦