Majors gain against the Dollar but the fundamentals suggest a reversal

Price action in the currency market has been nothing short than unexpected during the past couple of days leaving investors and analysts wondering what went wrong and what did they miss. As we have detailed in our reports recently the theme in the market is a strong pro-Dollar rally based on the encouraging fundamental developments over the Atlantic. However during the past couple of days the US currency has been giving up its gains against the rest of the majors.

The Dollar has been weak and allowed the likes of the Euro, the Pound and other currencies to pick up medium to strong gains against it before and after the release of the FOMC meeting’s minutes  making everybody wonder whether they lost the plot. Indeed the reaction of the Dollar is not consistent with the fundamental developments that favor a rate hike from the Fed in December as we would have expected the currency to drive higher against its peers.

However we need to explain here that the correction in the Dollar has nothing to do with the fundamental environment and traders have definitely not lost the plot nor missed something. The Fed minutes were as bullish as they come but the Dollar has been so overbought across the board that there were simply no more buyers and even though the timing was weird the US currency corrected lower. This means that we believe that the correction will not last long, it’s possibly over already and the price action will be aligned with the fundamental expectations soon.

The Euro benefited from this situation and gained against the Dollar climbing above the 1.0700 level, as mentioned above there has been nothing in the news to justify a stronger Euro at this time so we expect the recent rally to be over soon. This would allow us to sell the Euro higher against the Dollar and today ECB President Draghi is delivering a speech that could provide the spark for a rally lower should he repeat the central bank’s intention to ease further. Should the Euro pick up momentum to the downside then we’ll be looking to follow the currency towards its previous lows.

The Cable has also gained against the Dollar in recent sessions managing to climb above the 1.5300 level for a brief time. However yesterday’s UK Retail Sales not only printed worse than expected but also revised the previous month’s impressive results. As such the Pound should be trading lower against the Dollar and we expect price action to catch up with the fundamental drivers soon, the Pound has a strong backing behind it but the recent rally has been nothing than a short squeeze for the Dollar and we expect this to change soon.