More temporary USD weakness

It has been mentioned previously that as we entered the second quarter of 2015, the USD would be vulnerable to sudden downside risks if economic data eases back pressure on the Federal Reserve to begin raising interest rates, and further weak retail sales figures yesterday afternoon presented an opportunity for traders to take profit on Dollar positions. Although the retail figures were weak, and it is really surprising that there is just no correlation being seen in the combination of outstanding job creation and eased budgets benefiting retailers, I am not expecting the data to encourage interest rate expectations to be pushed any further back than September. For this reason, I also expect the USD to be able to regain its momentum.

The major downside risk the USD encountered yesterday was that GDP expectations could continue dipping lower, not that the Federal Reserve will swerve away from its repeated commitment to begin raising US interest rates this year. What the retail sales data has likely done, and this will be the same for any potentially weak data to be announced in the future, is provide the Federal Reserve with continued reasons to repeat that it will be cautious when it comes to raising interest rates. The first interest rate rise is now largely expected for this September, but continued weak data could allow the Federal Reserve to slow down the pace of any future interest rate increases.

Due to the upside potential of both the EURUSD and GBPUSD being limited to USD weakness, both pairs were able to recover recent losses following the USD softness. Saying that, this was likely just a short-term rebound while traders took profit on the USD and with the sentiment for both pairs remaining firmly bearish right now, it wouldn’t surprise me if we continue to erase gains. The upcoming UK election is now just three weeks away and the latest opinion poll showing that the Conservative party has regained the lead shows us all how close this election is going to be. I am expecting the GBP to continue facing downside risks until the election is out of the way at the very least.

Although I understand some optimism over the economic data in Europe showing some improvements, these are just minor and has not changed my bearish sentiment towards the Euro at all. The problem with the slightly improved economic data around Europe is that it is difficult to tell if it is linked to weaker euro and eased budgets following the decline in the price of oil, or the ECB’s continuous stimulus measures having its desired impact on economic data.

Why does my bearish sentiment towards the Euro remain unchanged? It should be remembered that the European Central Bank (ECB) has only recently launched a QE program that will run until at least September 2016, which in its own right will make investors think twice before purchasing the euro. As far as I am concerned, the ECB implementing QE was the beginning of a new era of monetary easing for a central bank that is no stranger to easing monetary policy at all.