ETF Securities Weekly Investment Insights USD Poised for further weakness?

Trade idea – LUSB LN & SUSB LN

Highlights

• USD has fallen against its major currency counterparts as the US Federal Reserve (Fed) projections fell short of hawkish expectations.
• The EUR/USD and GBP/USD are trading at the top of their respective ranges established after Trump’s election.
• Further upside would require a significant catalyst, which could come in the form of a failed attempt to pass healthcare reform in US House of Representatives. In this scenario the GBP has potential to gain as shorts remain considerably elevated.
• Otherwise, these pairs could retrace recent gains as the probability of rate hikes later in the year appear largely underpriced according to Federal Fund futures.

Last week, the failure of the Fed to raise its prospective interest rate trajectory put pressure on the US Dollar. The trade weighted value of the currency has fallen almost 2% in recent days tracing a 20 basis point (bp) drop in 10 year nominal US treasury yields. Despite raising the benchmark Federal funds rate by 25 bps as expected, the Federal Open Market Committee (FOMC) kept its December projections for the benchmark rate virtually intact, defying market expectations of a more aggressive tightening plan.

US Dollar weakness has coincided with positive news for the Euro and Sterling sending both pairs higher. Moderating rate hike expectations surfaced as Emmanuel Macron delivered strong performances in the first series of live presidential debates and the UK released healthy retail sales data. The confluence of factors has prompted both pairs to break through both their respective 50 and 100 day moving averages but remain at the top of recent ranges.

From a technical standpoint, the EUR/USD and GBP/USD have both reached key resistance points that have emerged following the Trump election. Traditional momentum indicators have yet to signal that either pair is overbought but are approaching such levels. A move higher above these levels would likely trigger buying but would require a significant catalyst.

One such catalyst could emerge from the contentious vote on a healthcare reform bill that is scheduled to be held in the House of Representatives today (having been postponed from yesterday) and acts as a precursor to Trump’s ability to pass his sweeping fiscal reform program. Should Trump fail then the US Dollar could come under pressure as optimistic growth and tightening expectations are curbed. In the alternative case where the bill is passed, then prospects for the US Dollar would be more positive. The market is currently pricing in a probability of a June rate hike at 54%, which could rise in coming months and allow the currency to retrace recent losses.

In terms of speculative positioning, shorts against the US Dollar are 70% below their five year average while longs have been trimmed to more reasonable levels. Meanwhile, Euro longs are at record highs and GBP shorts at record lows. In this respect, any further weakness in the US Dollar could be best expressed through GBP. Poised for further weakness?

Important Information

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