Three Things May Keep the Dollar Rally Going

The US dollar surged Tuesday on upbeat economic data. USD/JPY was the top performer and the pair broke out to an 8-year high. We take a closer look at three elements that may keep the dollar in demand. The remaining GBPUSD long in the Premium trades was stopped out today. Ashraf is long USDCAD and USDJPY for his personal account.

1) Data dependent

It's all about economic data and it doesn't take much to satiate the dollar bulls. The rally began last week on better housing starts data and more research suggesting the Q1 slowdown was due to various skews. At its core, the foundation of the dollar rally is that US growth is accelerating. Every data point matters.

On Tuesday, as Ashraf detailed, the durable goods orders report was the main catalyst but new home sales, consumer confidence and the Richmond Fed also helped.

2)  Hawk talk

The Fed likely breathed a sign of relief over the past two weeks as economic data began to improve. They stuck to the belief that soft economic reports weren't a signal on the underlying economy and stayed patient. The next step will be to ramp up the hawkish rhetoric in order to make the market believe that a hike is possible at any meeting.

3) Bond yields must move

This is the final piece of the puzzle but it's not straight-forward. Treasury yields weren't US dollar supportive on Tuesday but could be a catalyst in the days ahead. There was chatter that month-end buying driving down yields.

In the past month, the retracement in EUR/USD was precipitated by rising yields but it was disorderly and led by Bunds. Ideally, Treasury spreads over Bunds will expand in a more-steady fashion in the coming days and that will underpin the dollar.