A Bullish Case for the USD

Now that the second quarter of the year is about to end, it is time to look back and see what the main events on the currency market were. And, can we conclude or make a forecast for the rest of 2018?

If anything strikes the eye in the first six months of the year, that’s the USD. For once, both technical and fundamental analysis was right pointing to a higher USD.

2017 was strange, to say the least. Despite the Fed raising rates and ECB keeping the critical interest rate level into negative territory, the EURUSD rose from 1.06 to over 1.20. Sometimes currency trading goes irrational, kicking out traders with small accounts or traders that overreact by opening many positions in the same direction.

2018 changed everything. Here’s a summary of what 2018 brought so far.

The Technical Picture

Perhaps the most obvious move is the one on the EURUSD pair. After spending a couple of months flirting to 1.25, it came back to planet Earth.

In an almost vertical move, it reached 1.15 at the end of May – the start of June. A one thousand move following a break from a triangle that acted as a reversal pattern was enough to scare even the most hawkish traders.

Keep in mind that this is the most liquid currency pair of the entire Forex dashboard. When it moves, the flows in and out of it influence the whole currency market.

Another significant pair, the GBPUSD or cable, as it is also called, fell even more. It hit the lows 1.30 after a double top formation at the 1.43. With Brexit uncertainties and Bank of England trapped, cable only reflects the general USD strength.

Needless to say that similar moves appear on the AUDUSD or USDCAD, with the USDJPY being the only major pair that lacked momentum.

Hence, a bullish technical picture for the USD for the first half of the year. What next?

The Fundamental Picture

If the technical picture looks bullish, the fundamental one is even more. Not only that the Fed hiked the federal funds rate twice, but it vowed to hike it two times more this year.

With the interest rate level already at 2%, the interest rate differential between the USD and other currency pairs increased in 2018. Judging by the forward guidance provided by the major central bank, the differential will remain the same, if not getting wider in the USD favor.

Conclusion

It seems that the Fed won’t back down from its plan to hike the interest rate two more times in 2018. It would bring the federal funds rate to 2.5%, while the interest rate in other major central banks’ jurisdictions remains at depressed levels.

If that’s the case, the fundamental picture calls for even a higher dollar. If there is one currency pair to watch a possible higher USD, it may be the one that lagged to rally so far in 2018: the USDJPY pair.

This article was written by AMarkets