The US Dollar has a very impressive rally despite all the bad news which were released out of the US. It appears as nothing can stop the US currency from its advance. The US Dollar rallied as the US has released slightly positive data, but for the largest part the US Dollar has also rallied when the US reported negative economic data. How much further can the US Dollar rally from current levels or are we near the top of its current move and is it time to take profits and look the other way?
The opinion on this matter differs and one key factor where opinions go a separate way is if you believe that the US Federal Reserve will raise interest rates this year or not. The hope for an increase in interest rates has driven the powerful rally in the US currency which has gained steam as more and more analysts think the Fed may raise rates by September of this year. A lot of pressure has been built on the US central bank to please the US Dollar bulls.
Buying any currency fueled by hopes that the respective central bank will act as the majority expects it to act is a very dangerous trade and forex traders should make sure they know why they have taken the trade besides hope for central bank action. This is especially true if fundamental data does not support an increase in interest rates. This is the case in the US right now as many economic reports point towards a sharp contraction in GDP and if the series of depressive reports continues could lead to a recession in the US this year.
Everything in the US from durable goods orders to retails sales to the housing market suggests an economy in bad shape. An increase in rates is highly unlikely in the current environment and the US Federal Reserve may be closer to debating another round of stimulus rather than tightening monetary policy. This is an extremely bearish scenario for the US Dollar which many retail traders do not considers as they follow the popular analysts who may not change their mind until it is too late.
Just take a look at the British Pound and what happened to the British currency. Forex traders rallied behind calls for an increase in interest rates by the Bank of England and the currency took off. The UK economy did have positive economic reports which allowed the rally to be extended at a time when other economies look less favorable. The US Dollar is very likely to follow in the footsteps of the British Pound and forex traders may want to familiarize themselves with this scenario.