US Dollar skyrocketed after NFP showed up better than expected. However, this week, there seems to be a careful approach among traders. Volatility has only lessened slightly, but people tend to unwind greenbacks that has already overbought almost everywhere.

Last Friday, US Dollar skyrocketed after NFP showed up better than expected, confirmed ADP data improvement in the day before. However, this week, there seems to be a careful approach among traders. Volatility has only lessened slightly, but people tend to unwind greenbacks that has already overbought almost everywhere.

Dollar

 

Trapped By Stagnation And The Bears

In the last three months, Euro, Yen, Pounds, and Swiss Franc, have depreciated more than 5% against the US Dollar. Diminished geopolitical risk, as well as sharp improvement of US macroeconomic data is said to be the driving force behind US Dollar strength. But it needs to be noted that deteriorating growth around the world, particularly in the Eurozone, also have something to do with that.

The IMF yesterday (8/10) has lowered its forecast for global economic growth, as well as for Japan and Eurozone. This is the third cut from the IMF this year alone. This time, the three strongest economy in the Eurozone: Germany, France, and Italy, is also downgraded. On the fundamental front, Germany economic reports has been highly disappointing lately. August industrial production in the country has sunk as much as 4%, yesterday's report said. On Monday, Factory Orders also fell far from expectation. These are proofs that economy in the number one country in Eurozone has contracted significantly. For the Eurozone, France prolonged stagnation does not help them either. In the situation, ECB that is hoped to support the economy through looser monetary policy faced opposition from Germany.

Pertumbuhan

The comparison between US economic growth and the Eurozone's above clearly define just how wide is the gap between the two region. It is clear that Eurozone has fallen headlong into recession, while the US swiftly step up its stake in recovery. The gap could also be seen from Euro performance against the US Dollar. Compared to Pounds, Swissy, and Japanese Yen, the Euro has fallen the most, depreciated as much as 8% in the last 3 months.

Grafik

Market Seeks FOMC Confirmation

The event that is highly anticipated this week is the release of FOMC meeting minutes tomorrow, which is also the first day of G20 meets. As the Eurozone fundamental calendar is quite quiet, EURUSD is expected to move according to market speculation of the Fed rate hike. Speeches from FOMC members is eyed because market is still looking for bonafide signal on the Fed rate hike timing.

An indicator that is often being mentioned as a determinant in rate hike by FOMC chairwoman, Janet Yellen, is US job market improvement. However, last weeks's NFP report that has seen jobless rate fall to 5.9% is not followed by increasing wages. Even after unemployment is under 6%, wages remain flat. This one could be quoted as the reason for Yellen not to hike rate sooner, even as tapering nears its ending.

This week's FOMC meeting minutes publication deserves special attention, because this is the last minutes before October FOMC Meeting that is said to be when the remaining tapering will be scrapped. Therefore, the meeting that will be held near the end of the month is expected to give hints on Fed rate hike. If the minutes give nothing, then it could be seen as a dovish sentiment, and negatively influencing market sentiment toward the US Dollar. This is why doubt has prompted the market to unwounds the US Dollar yesterday, despite of everything.

Nevertheless, bad fundamentals naturally could drag the Euro again to much lower levels. Widening gap between the Fed normalization policy and the Eurozone's low rate principle has given no place for the EURUSD to recover. The Fed is headed toward rate hike, while the Eurozone has not even launched its large-scale stimulus yet. Generally, analysts are agree that EURUSD is still bearish in the long-term.

 

Correction Risk

However, prolonged speculation in the market about teh Fed rate hike has pushes US Dollar so high that it lose its fundamental footing. Quoted by CNBC, Gavin Wendt from Mine Life Pty mentioned that USD strength does not reflect the economy it stands for, and the market missed the real potential of Fed rate hike. He expected the Fed will rise rates in mid-2015, because the economy could not support it.

In previous editorials, we have repeatedly warned of the risk of strong currency exchange rate. When currencies are moving up despite of its fundamental, it could hurt the economy. In such cases, the central bank might jawbone or intervene so that the currency will come back to its appropriate level. Alternatively, the central bank could wait till the currency weaken itself due to extreme overbought that has negatively impacted the economy. These scenarios open up the chance for US Dollar correction.

EURUSD
Technically, EURUSD in H1 chart has passed a significant correction, and it seems like there is possibility that a head-and-shoulder pattern is forming. A penetration of level 1.2590 will mean that Euro is going further downward. An observation of higher timeframe indicate that there are potentials for the Euro to fall up to around 1.2000 which was touched last in 2012. However, there is also possibility that EURUSD will pierce through 1.2672 and reach higher resistance.