USD begins to show vulnerability to violent swings

The USD came under unexpected pressure and encountered aggressive selling on Friday afternoon after investors reacted negatively to a report showing that quarterly US wage growth had increased at its slowest pace for over twenty years. The negative reaction towards the USD was basically because the report knocked-back expectations for a US interest rate rise in September, but this is far from being confirmed, and we later saw appetite for the USD return after an impressive Chicago PMI continued to outline that the US economy is strengthening on a sustainable basis.

I think that the violent swings we encountered with the USD on Friday afternoon, due to economic data that is not usually considered high-risk,highlights how sensitive the USD will be to turbulent periods of increased volatility as the markets continue to remain largely unclear on when the Federal Reserve will begin to raise US interestrates. Expectations for a US interest rate rise have not yet been pushed further back than September and if this Friday’s NFP report continues to highlight that job creation is the star performer of the US economy, we are going to experience a resumption of USD appetite among traders. The NFP report would have to show that momentum in job creation is slowing for interest rate expectations to be pushed back until later this year, which would also expose the USD to a period of aggressive selling.

The manner in which the USD alternated between both buying and selling momentum on Friday reminded me how investors used to react to economic data from the United States when they were unclear over when the Federal Reserve would begin tapering their Quantitative Easing stimulus. While the USD was vulnerable to weakness against some of its currency trading partners at the end of the week, one thing that stood out to me was the refusal of Gold to trade above $1100. There is complete hesitation from investors to purchase Gold and the combination between the break below the psychological $1100 level a fortnight ago and its refusal to maintain itself back above this level highlights that we have entered a new period of Gold weakness.

Moving onto a different commodity, the selling in the oil markets has resumed once again with WTI challenging a three-month low around $46.69. Oil dropped heavily following the news that there was another large gain in the number of US oil rigs with this furthering concerns onoversupply in the market. The oversupply anxieties have acted as a dominant threat to investor sentiment since the beginning of theyear,but it is actually the demand side of the equation that I am paying more attention to right now. Anxiety remains high that the China economy might be entering a deeper than previously expected economic downturn and this would have negative consequences on the prospects of global economic health. Economic data from China will represent a huge risk to the commodity markets over the upcoming months, which ultimately means that commodity linked currencies will be exposed to further pressures.

The GBPUSD is continuing to range between 1.55 and 1.56 and buyers of the Pound will be optimistic that the upcoming Manufacturing PMI raises investor sentiment by highlighting the attractive UK economic outlook. The UK economy is an interesting position because if it wasn’t for depressed inflation, the Bank of England (BoE) would have raised UK interest rates by now. There is still optimism following last week’s robust GDP data that the BoE will raise interest rates soon, but this is very unlikely to be the case while inflation levels remain near record low levels. The recent gains in wage growth and disposable income would need to be filtered through other aspects of the UK economy for inflation expectations to improve and this is when the BoE would be more comfortable to begin raising UK interest rates.