[MARKET REPORT] US dollar starts the week strong

The US dollar has reached its highest peak in almost a whole year in early trading on Monday with EUR/USD trading at 1.3184, the strongest performance of USD since 9 September 2013. This dollar strength follows Friday’s meeting at Jackson Hole, Wyoming, where Janet Yellen, Chairwoman of the US Federal Reserve, said that labor markets still need to heal further before economies can withstand higher interest rates.

Yellen was expected to speak in more detail about monetary policy at this meeting, and thus investors were left disappointed that she focused more on the labor market and didn’t provide a clear time frame as to when an interest rate hike may take place in the US. Most market participants are assuming that the much-discussed interest rate will take place in 2015, although there was buzz before Friday’s speech that it could take place sooner rather than later. This is now not so certain.

USD traders are now looking ahead to Thursday’s second reading of Q2 GDP. The first reading came in at a surprisingly positive 4% and while the revised figures are usually largely ignored, recent GDP data has shown to have been substantially revised on the second and third readings. While the reading is expected to be revised down to 3.9%, should this week’s data vary more than the original reading then the market could experience some volatility in response. EUR/USD pivot point is 1.3191 with resistance levels at 1.3196, 1.3203 and 1.3208; and support levels at 1.3184, 1.3179 and 1.3172.

European Central Bank (ECB) President Mario Draghi also gave a speech at Jackson Hole on Friday where he reiterated that he is ready to take action to stimulate the Eurozone. Draghi has been criticized by some camps for being all talk and no action of late and so his comments failed to make much of an impact on the markets. This Friday the latest CPI inflation data is released and there is a real threat of deflation for the Eurozone economy. If the data continues to reflect that there has been no impact from the measures that Draghi has thus far implemented, Draghi may be forced to make good on his promises to take action by finally green-lighting asset purchases from the ECB. This is what the market wants and, arguably, it’s what the market needs.

The Eurozone is likely to only face more challenges in the coming weeks and months as the impact of the sanctions on Russia becomes known. There are huge fears for the health of the German economy, the powerhouse of the EU, as it is an export-led economy which considered Russia to be an important trade partner. If we see further drop in inflation, further weakness in the euro should also be expected.

It is a quiet week for the UK with a bank holiday on Monday and no economic releases of any note. The euro has been trading lower against the pound, with the pivot point at 0.7962 and resistance levels at 0.7964, 0.7967 and 0.7969; with support levels at 0.7959, 0.7957 and 0.7954.

Similarly, the Asia-Pacific region also does not have many major data releases this week with the main highlights coming from Japan. Data on household spending and retail sales in Japan is expected on Friday and this will be carefully observed for evidence of spending patterns in Japan following the new sales tax introduced in April. Understandably, there has been a drop in consumer spending since the introduction of this tax, but this month’s data will reflect how deep-seated this trend for lower spending has become. With a second tax hike a possibility for December, investors will be hoping for an improvement in consumer spending. The USD/JPY pivot point is 104.13, with resistance levels at 104.17, 104.22 and 104.26; and support levels at 104.07, 104.03, 103.98.

*Ahmad is chief market analyst at FXTM