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Is the Dollar Baaack?

Written By Matt Weller, CFA, CMT | 2018-09-14 16:02:28 GMT

The momentum for EUR/USD shifted back to the downside with today's reversal. The euro rallied after the ECB's meeting on Thursday but today, there were reports that some policymakers wanted a more cautious tone that suggested the risks were tilted to the downside. Data was also weak with the Eurozone's trade surplus shrinking to its smallest level in 4 years in July. The divergence between Draghi's outlook and the performance of the economy makes next week's inflation and economic activity reports very important. If CPI and PMIs also surprise to the downside, EUR/USD will fall to 1.15. However if Draghi is right and the PMIs show that the outlook for the economy remains bright, EUR/USD could squeeze back above 1.17.

Sterling turned lower on the back of U.S. dollar strength and conflicting Brexit headlines. Brexit talks are moving in a positive direction but the Irish border is still the big problem. UK Brexit minister Davis thinks they are closing in on a deal but the EU denied the progress. Either way Brexit headlines and UK data puts sterling in focus next week with consumer prices and retail sales numbers scheduled for release. GBP/USD ended Fridayat its lows, putting the pair at risk of testing 1.30.  

Although the Australian and New Zealand dollars hit fresh 2 year lows this past week, both currencies rebounded on the back of stronger data. In Australia business conditions improved and job growth strengthened and in New Zealand manufacturing activity accelerated for the first time in 4 months. There are no economic reports from Australia but second quarter GDP numbers are due from New Zealand next week. Despite the decline in dairy prices, stronger retail sales and trade activity should bolster growth in Q2. Trade headlines will continue to pose a risk to both currencies as the U.S. threatens China with additional tariffs while proposing a new round of trade talks. Both currencies turned lower on Friday, shifting momentum back to the downside.

Meanwhile Canada - U.S. trade talks has yet to yield any meaningful progress.Canadian Foreign Minister Freeland should be back next week to continue negotiations. The main issue is dairy - Canada restricts how much foreign milk is sold to the benefit of their local industry but the U.S. wants those restrictions relaxed so U.S. producers could sell more milk and cheese to Canada. Freeland is the first to admit that plenty of work still needs to be done and according to reports this week President Trump is willing to drop Canada from the U.S.-Mexico-Canada pact if they don't agree to his terms. The talks haven't completely broken down but investors aren't happy with the progress so far hence the recovery in USD/CAD. Canada's economy is also will be in focus next week with retail sales and consumer price reports due for release.

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By Matt Weller, CFA, CMT
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