the U.S. dollar continued to rise against all of the major currencies with USD/JPY extending its gains above 114. A test of 115 appears inevitable but a break may be more difficult. There are a number of reasons why the U.S. dollar is so strong but all of them center on the market’s expectations for June tightening. Fed fund futures have been pricing in 100% chance of a quarter point hike in June and a 63% chance of a follow up move in December. With each passing day we hear from more U.S. policymakers who appear to support immediate tightening. Fed President George said “slower Q1 growth is no reason to pause gradual Fed hikes” and “overshooting on unemployment poses risk to expansion” as does delaying gradual tightening. Fed President Kashkari did not touch on policy but Rosengren described rates as quite low by historic standards and said 4.4% jobless rate would be below full employment. Data was better than expected with small business optimism falling less than anticipated and job openings rising according to the Job Openings and Labor Turnover Survey.
Are investors getting ahead of themselves? Perhaps but if every one of the U.S. policymakers who have spoken since the jobs report say rates should rise, then we better believe them. When USD/JPY broke above 113.40 yesterday, the uptrend was confirmed and now buyers will be looking to swoop in anywhere on the 113 handle looking for a test of 115. Whether this level breaks or hold will most likely hinge on Friday’s jobs report because consumer spending has been the missing piece of the puzzle.
Sellers also drove euro flows throughout the North American trading session, taking the pair as low as 1.0870. Investors continued to ignore better than expected data with German industrial production less than anticipated and the country’s trade and current account surplus exceeding forecasts. These reports reinforce German Finance Minister Schaeuble’s comment that “normalization of ECB policy will start shortly,” a comment that EUR/USD traders also ignored. Technical forces are driving the euro lower but fundamentals support a stronger currency which is why the “gap” that everyone is watching near 1.0750 may still go unfilled. Even if EUR/USD falls that far, buyers could swoop in quickly as they realize that Emmanuel Macron’s victory, Eurozone data and ECB policy favor a rise in the euro. The central bank is getting closer to tapering bond purchases and an official announcement could be made in the fall. However with the prospect of another Fed rate hike likely to support the greenback, the euro may be a better buy against the Japanese Yen. Meanwhile the Swiss Franc continues to fall as the pair trades solidly above parity. There’s a lot of resistance at 1.11 but when USD/CHF trends, the wind is behind its back and the move can last for days. Sterling on the other hand is holding firm ahead of the Bank of England’s monetary policy announcement and Quarterly Inflation Report which is a sign of investors looking for optimism and a positive outcome.