Richard Franulovich, Research Analyst at Westpac, suggests that for the first time in many months the USD looks well positioned to mount a serious attack at the key 100 resistance level. Key Quotes The USD index has been held to a broad 93 - 100 range for more than twelve months. The trade location for fresh longs here (98.5) does not appear to be overly compelling. A lot is expected from the ECB when they meet next week 10 March, the EONIA strip pricing in a 13bp deposit rate cut and cumulative cuts of -29bp though year’s end. The recent tightening of financial market conditions could have a greater negative impact on the U.S. economy should this tightening prove persistent and the continuing decline in energy and commodity prices may signal greater and more persistent disinflationary pressures in the global economy than I currently anticipate.” But, against all that there are at least two compelling reasons that suggest this run up in the USD index has serious legs: 1) a number of data points in recent weeks signal that the US economy may be finally closing its under-used resources gap; and 2) speculative exposure to the USD has fallen precipitously in recent weeks. In barely a month several key data points have signaled strongly that the US Phillips curve may indeed be alive and well – Jan core CPI rose 0.3% in the month taking the annual rate from 2.1% to 2.2%, Jan core PCE rose 0.3% and the prior month was revised up 0.1ppt taking the annual rate from 1.4% to 1.7%, whilst Jan average hourly earnings rose 0.5%, leaving the annual rate at 2.5%, the second consecutive read at/above 2.5%. The collective signal is clear. The implications for the USD are nevertheless clear-cut. Even if the Fed looks through evidence that the US has closed its resource gap, longer term yield spreads seem set to continue to widen in the USD’s favour. Curiously, just as the US is at last showing signs of closing its under-used resources gap the speculative community is quitting the USD, culling its long position to effectively neutral. The net long USD position as of last week stood at +63.5k contracts, down sharply from a net long position closer to +400k contracts in early December, the smallest net USD long in almost twenty months. No one currency dominates the adjustment - the long USD position against EUR, JPY, AUD, CAD and CHF have all fallen away sharply in recent weeks. It is rare to see a market effectively flat a currency at a time when the underlying economy is finally showing clear signs of closing its under-utilised resources gap. For the first time in many months the USD looks well positioned to mount a serious attack at the key 100 resistance level.” For more information, read our latest forex news.