End of currency and commodity boom in sight
Technical signs are increasingly pointing towards short-term topping potential in most of the major currencies and commodities, according to analysts.
Currency analysts predicted that the bull runs seen in gold and oil in the last two weeks showed signs of peaking, and could end in a pull back towards $1,382 for gold and $97 for oil after some corrective selling.
In addition, the immediate outlook for both the euro and pound is bearish, which should prove positive for the dollar in the short-term.
Joel Kruger, technical analyst at DailyFX, said: "Despite all the gains in the euro last week, the market still managed to fail ahead of the key November highs and closed lower on the week. This ends a sequence of five consecutive weekly bigger lows and could warn of deeper setbacks ahead."
He added that the pound remained under pressure and could establish itself back below 1.6000 against the dollar.
Commentary from dovish Monetary Policy Committee member Adam Posen that inflation will fall back into 2012, followed less-hawkish MPC minutes released last week and weaker-than-expected UK retail sales in February. All three combined to provide a bearish outlook on sterling.
Anti-cuts protests held over the weekend in London also added to downward pressure on the pound ahead of the latest revision of fourth-quarter UK GDP due out tomorrow.
Duncan Higgins, currency market analyst at CaxtonFX, said: "Sterling suffered again on Friday amid a change of tack from the Federal Reserve, with the rate currently trading at a two-month low. US GDP for the fourth quarter was revised upwards from 2.7% to 3.1% and this triggered comments from Fed policymakers indicating that QEII would definitely be ended in June and could possibly end prematurely."
Recently the dollar has lacked support because of low interest rate rise expectations. But the latest commentary from St Louis Federal Reserve Bank President, James Bullard, has provided dollar bulls with an encouraging handle.
Meanwhile, the euro was slighted over the weekend when state elections in France and Germany showed poor performances by the ruling parties.
Analysts at Travelex said with these defeats coming hot on the heels of the political shake-up in Portugal last week, the upheaval reveals "underlying unrest with the populace over which direction politicians are taking the eurozone".
German Chancellor Angela Merkel's election defeat in Baden-Wuerttemberg weakens her authority on certain key issues, according to some commentators.
Kruger said these issues included the amount of support Germany will provide to the indebted eurozone nations. "With Portugal facing intense pressure for an EU/IMF bailout, Irish banks expected to unveil massive losses, and the Spanish cajas [savings banks] in need or raising 15 billion euro, this should not help the euro's cause," he said.
"Additionally, there is still a good deal of uncertainty surrounding the Japanese nuclear contagion threat and this is not seen helping matters for the somewhat risk correlated euro."
The commodity-linked currencies (Australian, Canadian and New Zealand dollar) are also due a correction after a period of outperformance recently. "Part of the relative strength in these has undoubtedly come from surging oil and gold prices, but we feel both oil and gold are at risk of some major short-term corrective selling," said Kruger.
Last Friday AUD/USD touched the highest level since the Aussie started trading freely in 1983, because gains in global stocks and easing concerns about Japan boosted demand for higher yielding assets.
But the sentiment at the start of this week seems notably different, with the Japanese nuclear situation still not under control and euro-debt fears creeping to the surface once more, amid worries that the EU summit last week did not deal with it sufficiently.