US dollar bulls in complete control
Last week, the US dollar (UUP) index bounced back from a minor pullback in the week ended May 11. It was helped by the rise of bond yields across the board. The index closed at 93.6 for the week ended May 18, a 1.2% rise.
The divergent economic growth outlook for the US economy and other developed market economies remains the key driver for the currency markets. That drove multiple developed-market currencies to multi-month lows in the week ended May 11. The United States is expected to lead the growth momentum, thanks to a fiscal push at the end of 2017 and the Fed continuing its monetary policy tightening plan. Both are positive for the US dollar.
Speculators moving into long dollar positions
According to the latest Commitment of Traders report released on May 18 by the Chicago Futures Trading Commission, large speculators and traders have trimmed their short positions on the US dollar index. The number of contracts decreased from 549 (short) to 18 (long). Investors continued to move out of the overcrowded short US dollar trade as dollar bulls remain in the driver’s seat. According to Reuters calculations, net US dollar (USDU) short positions decreased from $10.8 billion to $9.8 billion. That’s a combination of US dollar contracts against the combined contracts of the euro (FXE), the British pound (FXB), the Japanese yen (FXY), the Australian dollar (FXA), the Canadian dollar (FXC), and the Swiss franc.
Key events for the US dollar this week
The US dollar is likely to remain in the driver’s seat in the foreign exchange markets this week. Traders could be waiting for the May FOMC (Federal Open Market Committee) meeting minutes scheduled to be reported on Wednesday. Any signs of hawkishness could lead to a further appreciation of the US dollar index.
In the next part of this series, we’ll explain why the euro depreciated in every session last week.