U.S. dollar futures moved modestly higher Friday morning, making a fresh contract high as investors embrace warming relations between the United States and other leading economic areas. Adding to the improved sentiment is an extremely bullish chart pattern and better-than-expected durable goods sales, coming in at 0.2% vs -1.2% consensus. European data overnight was weak again, bolstering the relative strength of the U.S. economy. This causes a domino effect for dollar strength because the prospects for another Fed rate cut this year are dwindling as surprisingly positive US data continues to impress investors.
The CME now forecasts only a 45% chance of a 25-bps cut at the October meeting. Without further monetary loosening by the Fed, the liquidity shortage will squeeze the dollar higher until quantitative easing is inevitably rolled out by the central bank. The only question is when will this happen and what will it take to force the Fed’s hand? Surely their ability to fend off recession is diminishing as rates move toward zero. They continuously put faith in the resilience of the U.S. consumer, but if they wait to roll out QE until the consumer is on the ropes, it may be too late.
The Japanese Yen is proving a failed rally as safe-haven risk is removed from markets. The British pound is in a period of correction after a 5-cent climb over the last month. Adding to the technical pressure is the mess of divided Parliament, as Boris Johnson joins his friend Donald Trump on the impeachment pyre. The Canadian dollar is holding up in the face of a bearish oil market, possibly riding the shirttails of the USD. Relatively speaking, all major currencies will likely remain depressed if the strength of the USD continues. Multiple bullish fundamentals are gripping the greenback, and it appears the only thing that can stop that train is our own central bank.