Euro-Dollar Breaks 1.18

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The dollar rises against the euro as U.S. economic resilience is becoming harder to ignore.

"Solid US data has underpinned the USD, as well as the release of rather hawkish January Fed minutes," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The euro to dollar exchange rate (EUR/USD) pierced 1.18 and trades at 1.1757 at the time of writing Thursday as its retreat from highs at 1.2050 - reached on January 27 gathers pace.

From a tactical perspective, it's increasingly difficult to argue that the decline isn't warranted on the back of the incoming data:

"These developments have created clear upside risk for fourth-quarter growth projections; the Atlanta Fed GDPNow estimate has climbed toward 3.7%, sitting well above the earlier 2.6% forecast and the more conservative Blue Chip consensus. This broader economic engine is running much hotter than previously anticipated," says Kevin Ford, an analyst at Convera.

The Fed is paying close attention, and according to the minutes to the January meeting, it's the verdict of a number of FOMC members that the risks for rates are decidedly two-way on account of economic resilience: it could be a cut or a hike next.

"There seemingly is some discomfort about persistently high US inflation among the committee, with several members being willing to support a two-way path forward that would include the option of raising rates," says Marinov.

Like the Fed, the dollar is also taking notice: it gave a cursory glance to last week's news that the U.S. economy added about 130K jobs, significantly above the consensus forecast (~65K), but the currency is building some upside traction as more evidence of resilience comes through.

Above: The market has shifted higher its view on the future of U.S. interest rates this month.

This week it was revealed housing starts for December outpaced consensus forecasts, and the University of Michigan February consumer sentiment index beat expectations (actual ~57.3 vs expected ~55).

This data follows the January Fed decision, and will likely only harden the view of those members of the FOMC who think there's a case to be made for higher rates. That pushes back against the narrative that the dollar would be encumbered by a central bank that will cut by more than its peers this year.

Karl Schamotta, chief analyst at Corpay points out that it will be difficult for dollar 'bears' to argue that U.S. exceptionalism is over based on the incoming evidence.

"Consensus is gradually shifting toward another year of US outperformance, and a comparable improvement elsewhere is harder to identify," says Schamotta. "At some point, that should support a hawkish repricing in the dollar."