The Dollar had another very strong trading day yesterday, largely due to a strong session in Asia. The Yen and the Pound were particularly weak yesterday. Since breaking 140.00 last week Thursday, the currency pair USDJPY has gained almost 5 big figures (144.99 07sep hod). The currency pair GBPUSD dipped even below the covid-low at 1.1411 to print a new multi-year low (07sep lod 1.1405). While the Yen was sold on weak inflation and interest rate prospects, the Pound was sold on high inflation expectations. A member of the Bank of England did not even want to rule out 22% inflation yesterday.
In this mixed situation (we'll talk about the Euro in a moment), the Dollar naturally looks good. The economy is doing okay, inflation may not be quite as high anymore, but the interest rate path is pointing upwards. And with stock markets falling, currency investments into the safe haven Dollar obviously make sense. But (excuse the polemic) what makes little sense is that after the 15% rally in the Dollar this year, this very explanation should underpin the next rally.
You see I'm skeptical. For example, how I would have loved to read the survey of the omniscient FX strategists at the beginning of the year!
Ultimately, the Dollar failed to hold its daily gains yesterday and closed the day in the red. The question now, of course, is whether this is just a small pause ahead of the ECB or the start of a (minor) correction. The bullish Dollar sentiment could use a cooldown, but can Ms. Lagarde, for example, push the Euro today?
With respect to the time delay between ECB and FED of two weeks (Central Bank Calendar) I could imagine a short-term recovery in the Euro. If Ms. Lagarde delivers the expected 75 basis points and fuels the prospects of further rate hikes, a squeeze could be imminent. Above the mid Bollinger band (1.0027) and the minor resistance zone around 1.0080/90, the 50 ema (1.0155) will be the key level to watch.
In the medium term, however, this does not change the fact that the ECB continues to inflate its balance sheet. A lot of money is currently being pumped into the market again, especially for measures to reduce energy prices. And again, a quick reminder of what the ECB thinks of market mechanisms: “The ECB made clear last week that it is ready to intervene and discriminate between member countries by buying peripheral yields in particular” (Market update #9).
The Euro should therefore remain under pressure in the long term. Players who would like to have a position without directional risk are welcome to take a look at last week's straddle calculation again. Although the implied Vol has risen slightly since then, the levels should still be okay. Spot ref has been 1.0015, that fits well.
Good luck
Sebbo