FOREX: More temporary USD weakness

By Jameel Ahmad, Chief Market Analyst at FXTM
As we enter the second quarter of 2015, the USD will be vulnerable to sudden downside risks if economic data eases back pressure on the Federal Reserve to begin raising interest rates, while further weak retail sales figures on Tuesday afternoon presented an opportunity for traders to take profit on Dollar positions. Although the retail figures were weak, and it is really surprising that there is just no correlation in the combination of outstanding job creation and eased budgets benefiting retailers, I do not expect the data to encourage interest rate expectations to be pushed any further back than September. For this reason, I also expect the USD to be able to regain its momentum.
The major downside risk the USD encountered on Tuesday was that GDP expectations could continue dipping lower, not that the Federal Reserve will swerve away from its repeated commitment to begin raising US interest rates this year. What the retail sales data has likely done, and this will be the same for any potentially weak data to be announced in the future, is to provide the Federal Reserve with continued reasons to repeat that it will be cautious when it comes to raising interest rates. The first rate rise is now largely expected in September, but continued weak data could allow the Federal Reserve to slow down the pace of any future interest rate hikes.
Due to the upside potential of both the EURUSD and GBPUSD being limited to USD weakness, both pairs were able to recover recent losses following the USD softness. Having said that, this was likely just a short-term rebound while traders took profit on the USD and with the sentiment for both pairs remaining firmly bearish right now, it wouldn’t surprise me if we continue to erase gains. The upcoming UK election is now just three weeks away and the latest opinion poll showing that the Conservative party has regained the lead shows how close this election is going to be. I expect the GBP to continue facing downside risks until the election is out of the way, at the very least.
Although I understand some optimism over the economic data in Europe showing some improvements, these are just minor and has not changed my bearish sentiment towards the Euro at all. The problem with the slightly improved economic data around Europe is that it is difficult to tell if it is linked to weaker euro and eased budgets following the decline in the price of oil, or the ECB’s continuous stimulus measures having its desired impact on economic data.
Why does my bearish sentiment towards the Euro remain unchanged? Let’s remember that the European Central Bank (ECB) has only recently launched a QE programme that will run until at least September 2016, which in its own right will make investors think twice before purchasing the euro. I believe the ECB implementing QE was the beginning of a new era of monetary easing for a central bank that is no stranger to easing monetary policy at all.

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