Near Term Weakens But . . .
The US dollar weakened Friday morning after the release of US 2nd quarter GDP data. The data was strong at 2.6% but only as-expected and there was a downward revision to the previous month which seemed to accelerate the near term down trend. By mid morning the tables had turned however as traders look to the long term.
The recent down trend in the Dollar Index, caused by a shift in ECB stance and decline in FOMC expectations, may have reached bottom. The forces in play are driven by expectations that are not grounded in the data. Bullishness in the euro is likely over blown as the bank is still quite far from actually implementing any form of policy tightening, dovishness from the FOMC at a likewise extreme as forward looking data suggests expansion in the second half of the year.
The Index Of Labor Market Conditions, a gauge of 24 of the FOMC’s most closely watched labor market indicators, is signaling economic growth and expansion of that growth to post recession highs as early as this fall. The latest read shows activity just below the post recession high and well above the 0 line with momentum trending at record highs. A 0 line crossover as occurred late in 2015 has signaled the last 3 major bull markets.
The Index of Leading Indicators confirms this signal. The index has been positive for 11 out of the last 13 months in evidence of ongoing economic expansion. The most recent read has it rising to 0.6% and matching the highest levels in the past few years. The jump is indicative of ongoing economic growth and expansion of that growth. Economists at the Conference Board say that an uptick in growth is likely before the end of the year.
If these two indicators are right the FOMC could easily find themselves behind the curve and the market is beginning to recognize that. The data could easily begin to edge higher as early as next week’s NFP and unemployment bundle. As soon as we see inflation begin to heat up rate hikes will be back on the table and the dollar will arrest if not reverse its fall. Wage inflation is already trending above 2.5%, core inflation is not far behind and likely to rise alongside oil prices which happen to have hit a new 2 month high as the week drew to a close.
Traders should look for signs of support/resistance in USD pairs. The EUR/USD is breaking above a resistance target now and seem poised to head higher near term. Upside target is near 1.1800 in the near term with a chance resistance will set in. All it will take is a little weak data in the EU or a little strong data in the US.