Is the USD sell-off over? Yesterday’s FX trading session really was a game of two halves. The US dollar fell sharply during the morning, continuing the turnaround in its fortunes which began on Monday. However, it reversed direction as US traders got into their stride and ended the day higher against most of the majors. Back in May the EURUSD was trading just shy of 1.4000. But the euro has fallen sharply since then as the US economic outlook improved while data from the Euro zone showed a build-up in deflationary pressures and slowing (or non-existent) growth. On Friday the EURUSD hit 1.2500 – its lowest level in 2 years - following the release of better-than-expected US employment data. The euro has bounced significantly since then in what appears to be nothing more than a short-covering rally. It got another boost on Wednesday night following a decidedly dovish set of minutes from the Fed’s last FOMC meeting held back in September. The momentum gained from these helped the EURUSD to retest resistance around 1.2750/80 in yesterday’s European session. This area marks the 61.8% Fibonacci Retracement of the currency pair’s July 2012-May 2014 rally. However, traders were unable to push the euro above here convincingly. There are a number of interesting aspects to consider now. The Fed’s minutes highlighted the perceived risks to US growth from increasing evidence of a global slowdown. In other words, the US is doing well, but the Fed won’t dare raise rates because of the mess that everyone else is in. The FOMC also voiced concerns that recent dollar strength was likely to hurt exports and would, as a consequence, be a headwind for growth. Now what we have here is a classic example of central bankers controlling currency rates through words rather than actions. All central bankers want a competitive currency: it helps to boost exports while stoking inflation (which is vital if you want to erode your country’s debt relatively painlessly). However, they all have to take it in turns – that’s only fair after all. So, the European Central Bank has had the benefit of a weakening euro for the whole summer, and now it’s the Fed’s turn for a softer dollar. But it may not be that easy if traders decide to shrug off the rhetoric and pay heed to technical levels instead. If the EURUSD cannot break above resistance around the 1.2750/80 area then it could quickly retest support at 1.2500. Of course, it could bounce off here again and end up range-trading for a while. But a break below here could see the EURUSD fall rapidly and, depending on circumstances, run down towards 1.2050 – the low from the summer of 2012. Today’s significant economic data releases include the UK’s Trade Balance, Canadian Unemployment and US Import Prices. We also have IMF and G20 meetings and speeches from FOMC-voting members Charles Plosser and Richard Fisher.
Posted on: Fri, 10 Oct 2014 07:01:22 +0000
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