Is US Dollar Strength Justified? – Paxforex

The US Dollar has rallied during this week’s trading session especially gains the Euro and there has been an increase in US Dollar bulls in the market place. The US currency did rally from a very low base and some sort of profit taking was expected. The correction in the EURUSD was more due to weakness out of the Euro than strength out of the US Dollar.

Fundamentally the rally in the US Dollar was not justified with mixed economic results plus uncertainty out of the Federal Reserve under Janet Yellen.  Overall the economic recovery in the US has been week and first-quarter GDP showed a sharp contraction in the US economy which may be closer to a recession than financial markets have priced in.

This week saw weaker regional reports out of Chicago where the Fed National Activity Index for June was reported at 0.12 missing estimates for an increase to 0.18 from May’s downward revised reading of 0.16. The Richmond Manufacturing Index was reported at 7 for July which beat expectations for an increase to 5 from June’s 3. Forex traders hoping for an increase in interest rates were disappointed from the CPI data which showed inflation at an annualized rate of 2.1% while core inflation decreased to 1.9%.

The US housing market has had series of very conflicting reports released this week. Existing home sales rose 2.6% 5.04 million units in June and the US House Price Index rose 0.4% in May. On the other hand new home sales plunged 8.1% to 406,000 units in June. Economists expected a much smaller contraction of 5.8%.

Durable goods orders beat expectations for an increase of 0.5% and rose 0.7% in June, but May’s figure was revised lower to show a contraction of 1.0%. Durable goods order excluding transportation rose 0.8%, but capital goods shipments contracted by 1.0%. Overall forex traders are advised to remain cautious on any further rally in the US Dollar as there is underlying fundamental weakness not accounted for in the current price of the greenback.

Written by Paxforex