Is EURO's Rally Sustainable?

Investors continued to dump the dollar, driving all of the major currencies higher in the process. Euro led the gains, rising to its strongest level in more than 2 months. Better than expected Eurozone PMI numbers created hope that the ECB could delay easing. In the forex market, currencies are driven by the latest turn of events and while the ECB talked rate cuts for the first time earlier this month, the most recent shift came from the Federal Reserve and the market was positioned the wrong way. The euro was deeply oversold and while some investors expected the Fed to be dovish, no one expected 8 members to flip their views and start favoring a rate cut this year. Thanks to the Fed, the short-term pullback in the US dollar has now turned into a long-term top.

Technically, today's move in EUR/USD took the pair above all major moving averages opening the door for stronger move up to 1.1500. Don't expect next week's economic reports to help the currency as the move in the euro right now is driven entirely by the market's appetite for US dollars. Its no secret that the EZ economy is slowing and inflation is weakening but more upside surprises would give EUR/USD traders a stronger reason to bid up the currency.

While the fundamental outlook for the greenback shifted with the Fed's guidance, but traders need to be selective about the currencies that they choose to buy versus the dollar. USD/JPY is the most sensitive to headline risk. The biggest story next week will be the upcoming G20 meeting. If President Trump and President Xi reach a trade deal, we will see USD/JPY trade back up to 109 but if the talks fail to take a positive turn, the combination of continued trade tensions and a dovish Fed will allow USD/JPY to slip down to 105. While euro, sterling and Aussie are benefitting from US dollar weakness they are the least attractive currencies to buy because their central banks are also actively thinking about easing. Sterling on the other hand will be hampered by ongoing Brexit uncertainty. The Canadian dollar and Swiss Franc are the most appealing but the New Zealand dollar could also be attractive if the Reserve Bank suggests that they have no immediate plans for a follow up move to their rate cut in May.

The Canadian dollar should start to underperform. Canada has been one of the strongest economies and in many ways still is but after last week's disappointing retail sales report the cracks are beginning to show and the currency is due for a correction. Retail sales rose only 0.1% in the month of April, which is a dramatic slowdown from the 1.3% increase the previous month. We've also been skeptical of how much longer we'll see CAD data surprise to the upside because at some point Canada will feel the sting of weaker global growth and now that we have seen the first sign of weakness there should be a stronger sell-off in the loonie.