Recently, United States dollar has experienced its fair share of volatility. Seen as being a combination of a looming interest rate hike and rather bullish economic data, some analysts feel this trend will continue until (at the very least) the end of September. However, it is still important to appreciate the role of market fundamentals as well as investor sentiment within this momentum. We also need to ask how Forex investors can take advantage of what may very well prove to be a medium-term run. When we look at rather neutral data emerging from both the United Kingdom and the European Union, a hiatus back into the dollar could prove useful for those who are hawkish in terms of its projected growth.
An Abrupt Turn Towards the Positive?
Before delving into specific market mechanics, we need to analyse the position of the dollar in relation to historical trends. In the past, thematic leveraging within relatively thin markets has contributed to higher levels of risk in regards to trading (currency trading in particular). Although this may not appeal to relatively dovish traders, the fact of the matter is that those who are firmly behind the strength of the dollar may stand to make a healthy short-term profit when utilising USD/EUR or USD/GBP pairs.
The Continued Presence of the Looming Rate Hike
During the past week, chatter has continued to increase in regards to a rate hike proposed by the United States Federal Reserve. Indeed, all eyes seem to be looking towards what can only be called a hopeful financial horizon. Although it could be argued that a near-term rate hike might cause panic for extremely dovish market analysts, it seems (as of now) that the bulls still have the court in terms of the outlook of the dollar.
However, it should also be noted that there have been massive fluctuations in reference to the possibility of an upcoming rate hike. As one analyst pointed out, those who believe that a dramatic hike is certain amount to only roughly 30 per cent of the total consensus (1). This is not to say that the majority feel that a hike will not occur. It rather shows that seasoned investors are still remaining on the financial “fence” until more concrete data emerges from the Federal Reserve (or until relatively firm hints are dropped).
As an illustration of how much an upcoming rate hike is weighing upon investors, even a massive drop in the S&P 500 recently (as predicted) did not seem to phase traders as much as it normally would have. This could very well signal that they are looking past such movements in favour of keeping track of announcements by the Fed.
Less About the Dollar and More About Transatlantic Currencies?
Whether or not an interest rate hike by the Federal Reserve will take place is still yet to be seen. Some would even go as far as to argue that many are bullish on the dollar more as a result of rather neutral (if not flagging) data emerging from the United Kingdom and the European Union. Although the Brexit still has not produced the results that some had predicted, the fact of the matter is that the outlook for the pound is neutral to slightly bearish.
Now, this is not to say that we should see a massive amount of funds being transferred across the pond in the coming days and weeks. Rather, it is a wise observation to point out that investors may be interested in short-term dollar growth as opposed to pegging their Forex trades into markets which are even more uncertain. In many ways, this can be viewed as the lesser of two evils.
As always, it is critical to keep abreast of the latest news as it becomes available. CMC Markets is able to provide up-to-date information when it is needed the most. Should any snap decisions need to be made, they can be accomplished with the utmost sense of confidence. Although it is not likely that any major surprises within the Forex markets are in store, we cannot deny the effect that increased volatility is having upon the average trader.