Will the FOMC hike interest rates in September?
The USD Remains a Firm Favourite for Leading Currency in 2015
The USD has several factors working in its favour in the last four months of 2015. For starters, the prospect of an interest-rate hike in September will drive the greenback higher against a basket of currencies. Other factors are also working in favour of the world's reserve currency, notably quantitative easing policies in Europe, and the poor performance of equities markets around the world. Combined, these factors paint a picture that is favourable to the USD. The most important currency pair in the world is arguably the EUR/USD, since this pair is reflective of the world's biggest economies.
The euro was adopted in 1999, and it continues to face high levels of volatility as a result of the highly complex interaction between multiple economies. The leading causes of concern for the Eurozone include the Greek economic crisis, historically low levels of inflation, high unemployment, and general economic malaise. To combat these measures, QE policies are being put in place to expedite the velocity of money flow through the European economy to bolster economic activity. However, an expansion of the money supply invariably leads to a depreciation of the currency and this is precisely why the Euro finds itself trading at multi-year lows against a basket of currencies.
Is the $1.08 support level at risk for the EUR/USD currency pair?
This currency pair has been trading in a range between $1.0850 and $1.1000 for several months, among the lowest levels for the currency pair in recent times. USD$1 is approximately equal to €0.92, making parity a more likely prospect than ever before. It should be remembered that the dollar was stronger than the euro during 2000, 2001 and 2002, but since then the euro has gained the ascendancy over the greenback. It is entirely possible that the $1.08 support level will be breached, and that the two currencies will move closer to parity, especially given the strong fundamentals of the US economy and the growing uncertainty in the Eurozone. But it is unlikely to happen in 2015. In 2008, on July 15 the euro was trading at $1.5990 – its highest level on record.
The USD rallies on the back of comments by Dennis Lockhart
The FOMC (Federal Open Market Committee) may decide to hike interest rates in September according to the US Federal Reserve Bank of Atlanta President, Dennis Lockhart. This comment helped to strengthen the USD in midweek trading in early August. The US dollar exchange hit a decade high trading range recently, on expectations of a rate hike and concerns about Greece not being able to meet its financial obligations. Though the impact of a potential Greek exit from the European Union remains ever likely, its effect on the broader European currency has been minimal. What has impacted the greenback more is manufacturing PMIs. The data that has been released points to slowing growth, which reduced USD demand. The EUR/USD currency pair saw a lot of movement after European and American manufacturing PMIs were released.
While the Greek manufacturing sector has been lacklustre, the data coming from other European nations like Italy, the Netherlands and Spain were strong. Overall, the Eurozone has experienced positive growth. The US manufacturing PMI came in at 52.7, lower than the anticipated 53.5. This means that growth is slowing and it will likely influence the FOMC decision vis-a-vis interest-rates in September 2015. The timeframe for an expected rate hike remains uncertain, but Q3/Q4 or beyond is most likely. On a more positive note, inflation appears to be increasing in the US, based on the US personal consumption expenditure index which increased from 1.2 percentage points to 1.3 percentage points. With inflation increasing, the likelihood of a Fed interest-rate hike grows. However since the manufacturing PMI was negative, the interest-rate hike is off the table for now. Analysts remain upbeat about the prospects for the greenback against the euro, given non-manufacturing PMI, balance of trade data and employment data. These will definitely work in favour of the dollar against European currency.
Can Greece Meet its Debt Obligations?
When it comes to the euro, any improvement in retail sales will definitely be viewed positively for the currency. This will help to arrest any further gains the greenback makes against it. The elephant in the room for the European currency remains Greece. And while the poor performance of the Greek stock exchange has not impacted on broader European markets, the ability of Greece to repay the European Central Bank certainly will. On 20 August 2015 Greece is slated to repay €3.2 billion in loans to the ECB and if it fails to meet its debt obligations, the Euro will come under increasing pressure. One of the obstacles that Greece will have to negotiate in securing emergency bailout funds will be the International Monetary Fund. The IMF wants the debt/GDP ratio slashed for Greece and it hopes that this can be done by reducing the overall level of debt that Greece must repay. Germany however is vehemently opposed to that.
Various credit agencies have taken the position that as the threat of the Greek default recedes, traders will begin to focus on monetary policy. Quantitative easing measures currently in place in the Eurozone will weaken the currency, even if US data comes in under expectations. The US dollar index – which measures the dollar against a basket of 6 currencies – was trading at a day high of 98.2 to on August 5, 2015. The US dollar index (DXY) is also trading at 10-year highs, indicating precisely how strong the greenback is in global markets. This is particularly evident against emerging market currencies such as the South African Rand, Brazilian real, Turkish lira, Russian ruble and others. A strong US dollar makes it difficult for foreign countries to purchase dollar-denominated goods and services (especially commodities which are priced in dollars). And with slumping commodities prices, many producers in emerging market economies are taking tremendous strain. Overall, the prospect for ongoing USD strength for the remainder of 2015 remains intact, alongside a gradually improving European currency.