The week that just ended was dominated by the US dollar in the sense that it was the currency that was being bought aggressively the whole week. On some currency pairs this has been seen for the entire week, on others only at the end of it, but in general buying dollars was the name of the game. June FOMC meeting and press conference is coming in less than a month now and market is looking at the possibility that the Fed is going to hike the rates. If that is correct, we should see this trend continuing and any dip in the dollar should be viewed as just another opportunity to buy it again.
Our signal providers focused on two pairs this week, the USDJPY and EURUSD, buying call options for the first one and put options for the second one as a corrective wave, a flat, is forming on the USDJPY and an impulsive move started on the EURUSD from the moment it traveled above the 1.15 level. Signal providers used end of week and end of month expiration dates and taking into account that we didn’t have any meaningful bounces until end of the week, those options looked really good.
Fed Members Hints
FOMC (Federal Open Market Committee) minutes were released this Wednesday and market was just consolidating until the release not knowing what the outcome will be. To have an idea about the importance of these minutes, consider that chances for the Fed to hike the rates at the next June meeting were 4%. Prior to the meeting though, namely on Monday and Tuesday, a couple of Fed members talked and their tone was extremely hawkish on the dollar. This was surprising considering the Fed members are talking in between FOMC meetings in order to make sure market understands the message the Fed is delivering.
It meant, in this case, that the minutes will be hawkish and that was the case. At the release of the minutes on Wednesday the US dollar surged aggressively as they revealed Fed is ready to hike for the second time this year at the June meeting if conditions will stay as they are or even get better. All pairs moved, with EURUSD dropping from 1.13 to 1.12 in a blink of an eye, just to give you an example about the aggressiveness the market traveled.
And just like that, the probability for the Fed to hike rates at the next June meeting jumped from 4% to over 40%, and traders are looking now for hints and clues to see how the US data will look like until then.
The Pound and Brexit
Great Britain pound had a curious week as it traveled not based on the US events but based on what happened with the Brexit possibility. As you all know by now, in June there will be a referendum in UK and the people are going to be asked to vote for the UK to still be part of the European Union or to leave. It seems it is a difficult decision to be made as people are undecided and every information on the subject moves the pound.
This week on Wednesday a poll showed that the “stay” camp is in lead and that started a wave of GBP buying as it is believed that if the Britons vote for leave, the GBP will depreciate with something like 20% or more. So powerful was the move that values over 1.46 were reached and even if the minutes in the United States saw the dollar surging against other currencies, they did not affect the GBPUSD as the next day after the minutes the pair made another high.
ECB and NFP Next
Until the June Fed meeting we’ll have the pleasure to see the ECB interest rate decision and press conference as well as the NFP release in the United States and these two events are going to be separated by only a day. Therefore, expect volatility, but mainly expect the US dollar to move higher. Our signal providers will look for buying the US dollar on any dip especially against the Euro and commodity currencies like AUD and CAD as market participants will look at every economic data now to position for the rate hike in June.
Moving into next week, we are favoring still put options on the EURUSD and AUDUSD while looking to buy call options for USDJPY and USDCHF, having end of week and end of month as expiration date. CPI in the United States showed a slight improvement as even the core number jumped, and this comes to fuel expectations that the Fed is going to hike rates. In any case, until the June meeting comes, speculations should drive these markets.