Dollar strength returns ahead of key data

The FX market throughout April and May has been dominated by dollar weakness. However, signs point to a resurgence in the dollar which is expected to continue throughout both European and US sessions.

A dollar and ten pound note
Source: Bloomberg

EUR/USD back below crucial support level

Euro weakness was always likely to return to the fold at some point, given the Greek cloud that hangs over the single currency, along with a quantitative easing programme which is just in its infancy. However, the recent weakness in the dollar has unwound over 25% of the selloff in EUR/USD seen throughout the second half 2014 and Q1 2015, which made many bears question how long this resurgence was going to last for. That being said, Friday provided a clear indicator that the long-term downtrend looks set to resume, with a break below $1.105 which marked the neckline of a double-bottom formation back in March/April.

With the release of core durable goods orders later today, we are provided with a good idea of whether the US is finally going to pick up following a poor Q1. Unfortunately the adverse weather conditions can only explain so much and, should we continue to see weak figures, this has to be considered as a possibly more deep-rooted issue rather than the transitory explanations provided by Janet Yellen and co. With that in mind, further weakness in the durable goods and consumer confidence figures later today could bring yet more dollar strength as the rate hike perceptions are pushed back yet further.

Irrespective of whether it is fundamentally driven or not, I think that with a price below $1.105, the picture looks bleak for the euro and therefore a return to $1.06 seems likely in the coming weeks.

GBP/USD begins to return back to trend

The resurgence seen in GBP/USD also appears to be showing signs of weakening, following a 50% retracement of the 2014/15 selloff. While the UK economy is in good health, the ties to the eurozone as a trade partner are no doubt hurting demand.

Surprisingly, the uncertainty surrounding the election actually provided strength for GBP/USD which goes to show that in fact, the dollar strength story was likely to be the overriding factor as markets expected a return to norm in Q2 for the US, meaning a rate hike in the near(ish) future.

Despite the US having all but ruled out a June rate hike, it is clear that we will see the US raise rates before the UK. This is being reflected in the charts, with GBP/USD moving lower again this morning. A daily close below $1.545 seems likely today and that would mean we have created a new low, bringing a likely change of sentiment in favour of the bears.

The bearish divergence between price, the daily MACD histogram and stochastic points to a weakening in the bullish intent for GBP/USD and thus while the price is below $1.555, I expect to see selling as the dominant force going forward. 

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