Worse than expected retail sales and import/export price indices caused the USD to raise contrary to the common belief that a country’s currency strength directly correlates to the shape of the underlying economy. So what are market participants considering? Let’s find out…
Two types of data in the same batch
It is common to find that different types of economic data are released simultaneously. In such cases, it is also frequent that traders focus their attention on 1 or 2 types of data, normally in line with the main current drivers. Today, for example, lower than expected prices might have led traders to consider the monetary policy implications of in terms in lower inflation pressure, which translates into a more accomodative stance by the FED. Of course, import/export prices are a weak proxy of inflation, so we can expect a short-live impact on the USD rally. However, less inflationary pressure means an increase in risk appetite as players consider that monetary policy normalization can take place at a slower pace.
Monetary Policy Implications v. real causes?
Considering the hit suffered by the USD in recent sessions, partly due to the positive tone shown by BoE and ECB officials, markets typically “handle” less relevant economic fur liquidity and positioning purposes. Put it differently, even though prices are overall the reflect of economic solidness, we must take a look at the bigger picture, namely, that markets need liquidity to trend and overcome strong support/resistance levels, and that once the main drive is priced in, a contrarian reaction becomes useful to shift positions on the retail side.
Forex Academy’s Positions
We are still in favor of further bullish momentum on the Euro and British Pound, as well as deeper upward correction on the Aussie and Kiwi, thus today’s price action is expected to fade away against the USD rather soon.