Gain Capital on top as market eyes Fed rate hike

US retail broker sees dollar strength continuing

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Gain Capital has topped last week's three-month currency forecast rankings after predicting a broad period of dollar strength against other majors as the market looks for an impending interest rate hike from the US Federal Reserve this year.

On January 16, with USD/JPY trading at 1.17, the retail FX broker expected ongoing dollar strength to push the currency pair to 121. They opened at 1.20 on April 13, close to this forecast, while USD/CHF also rose in line with the firm's expectations, from 0.88 to 0.98.

"The main point we looked at was the Fed is really the only central bank that might raise rates, so that was going to be a driver for dollar strength. Some of the recent data points for the dollar have not helped. The Fed is going to be the one raising rates at some point this year, likely in September, which will make the dollar gain again," says Neal Gilbert, senior market analyst at Gain Capital in Michigan.

"The dollar is the strongest currency of a weak lot. The weaker data we've seen will make the Fed slightly more cautious about raising rates as soon as they determine the impact of the oil price or whether this signals a broader economic problem. They want to raise them though and they will keep the option of cutting them again as well," he continues.

The Fed is going to be the one raising rates at some point this year, likely in September

Gilbert was surprised by how far the euro dropped against the dollar, however, which was trading at 1.06 on April 13, according to data from Thomson Reuters. Despite a rebound on softer US data, the single currency has not been able to fully recover its losses.

"One of the things I was expecting was for the euro to head down quite a bit and then recover. It did recover up to around 1.10, but it has not stayed there, as I expected. I now see EUR/USD heading for parity sooner rather than later," he says.

One currency the broker feels may be due a rebound is the Australian dollar, which has weakened significantly against the US dollar in the last six months, dropping from 0.93 to 0.75.

"The Aussie has been beaten down so much lately and everyone assumed the Reserve Bank of Australia would cut interest rates, which they haven't done, and suddenly we've seen good employment numbers and improving economic numbers, so I think it's a little oversold at the moment," says Gilbert.

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