Is the strengthening of the dollar temporary?

08.07.2019 11:50|Forex conotoxia.com

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Friday`s data from the US labor market significantly influenced market expectations regarding the scale of interest rate cuts in the United States this month. Investors decreased the odds of cutting rates by 50 basis points, which also affected the US dollar.

Even before Friday's report on the US labor market, investors estimated the odds of interest rates cuts by the FED by 50 basis points from around 26 percent probability. After data showing employment growth by 224,000 with respect to the 160,000 consensus, this probability decreased to just 6 percent. The market still expects a cut of 25 basis points on July 31. Nevertheless, the significant easing of expectations favored the dollar on Friday.

The American currency strengthened to the other major world currencies. The EUR/USD fell to 1.12, from 1.14 at the end of June, while the zloty weakened to 3.79 against the dollar, where recently the exchange rate was at PLN 3.72. However, it should be taken into consideration whether one publication about NFP can permanently strengthen USD, since other Friday's readings disappointed. The unemployment rate has increased. The increase in wages also did not accelerate, which is a negative news.

What's more, investors on the FX options market interpret completely differently the recent strengthening of the US currency. Namely, the appreciation of the dollar is not reflected in investors' attitude from the options market, and the divergence has been deepening for two weeks. As of June 25, the EUR/USD has fallen by almost 2 percent. During this time, on the options market, investors seemed to be buying more options that may gain from the appreciation of the euro.

This is not a frequent phenomenon, that such divergences last for a long time, so soon there is a chance that one of these two markets will have to correct their attitude. At the moment the strengthening of the dollar can be taken into account with some precaution.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

59% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.


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