On the first full trading day of the New Year, the dollar roared back to life resuming its strong uptrend, aided by the rebound in the US yields as it rose against all of its major trading partners.
Over the holiday week, the dollar saw some profit taking with EUR/USD spiking hard on the last trading day of 2016 as algo driven flows temporarily pushed it to a high of 1.0640. But the fun and games didn’t last as the pair quickly unwound the move and was trading back below the 1.0400 figure in morning European dealing today.
On the economic front the data from the region was good, with German unemployment figures showing a much better than expected decline of -17K versus -5K eyed, but markets ignored the news as trading was once again driven by rising US yields with benchmark 10 year up more 5% on the day as it once again approached the key 2.5% level.
In UK the news on the economy was also better than expected as UK PMI surged to 56.1 from 53.3 eyed. This was the best reading in 30 months as the 18% decline in sterling since the Brexit vote is clearly having a positive impact on the manufacturing sector. Manufacturing however is a minor part of the UK economy and most economies expect that the boost to growth will be more than offset by the decline in consumer spending as the high costs of imports takes a bite out of UK GDP. Cable popped to 1.2300 in quick reaction to the news but then settled back to 1.2280 as the dollar strength trumped all.
The dollar rally is being driven by enormous investor expectations that the relatively strong US economy will accelerate even further under the leadership of Donald Trump who is expected to stoke growth through fiscal stimulus and deregulation. Mr. Trump’s policies will take months to be put into effect, but in the meantime the markets will need to key off the US data. Given the very high expectations, the possibility of disappointment is high.
This week the markets will get a look at both ISM Manufacturing and non-Manufacturing data as well as the key NFP readings. If the numbers come in relatively in line, the feel good dollar rally should continue with USD/JPY possibly reaching 120.00 while EURUSD could trip fresh lows at 1.0300. But any major misses in the data, set up the greenback for a profit taking selloff as sentiment is getting highly overbought.