U.S. Dollar Update
With Irish voters mounting an insurrection against the EU technocrats in Brussels, hope dims for the ratification of the Lisbon Treaty planned to take effect by Jan 1 2009, the 10th anniversary of the launch of the European common currency. This development is a serious political setback for the EU and its attempt to reform its institutions to accommodate its growing membership. One can reasonably expect some potential fallout from this emerging crisis to impact on the performance of the euro in the foreign exchange markets. However, negative political news may not be the only factor bringing the gravity-defying euro back to earth. If volatility is reduced in the financial sector and the U.S. economy stabilizes, the Federal Reserve will seize the opportunity to bring its easing cycle to a halt. As the focus shifts to inflation fighting, interest rates will begin to normalize and a floor put under the U.S. Dollar.
As throngs of lawmakers on Capitol Hill clamor for quick fixes to bring down soaring energy and food prices, excessive speculation, however vaguely defined, has become Public Enemy Number One, with OPEC and greedy oil companies running a close second. Politics aside, a view is emerging from the financial community that the long suffering U.S. Dollar may be partly responsible for so called “rampant commodity speculation” and stoking inflation fears. Consequently, the market has witnessed aggressive verbal intervention from both the Federal Reserve and the Treasury in the hope of inspiring renewed confidence in the beleaguered US unit. Going into the G8 summit this weekend, these efforts will likely intensify.
Technical analysis of the U.S. Dollar Index (DX) and the EUR/USD charts also suggest further strength for the U.S. Dollar, and conversely, weakness for the euro.
USDX (Daily)
The U.S. Dollar Index appears poised to breakout of a consolidation pattern since mid March. It is trading just above 74.05, firmly above the 100-day moving average at 73.33.
EUR/USD (Weekly)
The EUR/USD will close the week ending June 13 with a significant technical reversal pattern called weekly bearish engulfment according to candlestick charting, indicating further weakness likely ahead. This is based on the range of this week (1.5843-1.5302) exceeding that of the previous week (1.5774-1.5364), with the closing price also lower than the opening price.
If the top in EUR/USD was indeed put in for now in April 2008 at 1.6015, based on the measure of this up move from 1.1640 in November 2005, the first retracement level of 38.2% will target a move to 1.4350, coinciding with the weekly lows seen during the Dec 2007/Jan 2008 window.
It is clear that the technical picture for the U.S. Dollar has improved in recent weeks, aided by an increasing negative tone for the euro. Furthermore, as inflation begins to take hold in Asia, countries such as Korea, Thailand and Vietnam will encounter more difficulties dealing with rising prices while their currencies come under threat of devaluation.. If the situation deteriorates into a broad Asian contagion, repatriation of foreign investment in many Asian countries will accelerate, helping the U.S. Dollar regain its long lost status as a safe haven currency.
The data and comments provided above are for information purposes only and should not be construed as a solicitation or offer or recommendation to buy or sell any financial instrument or to enter into a transaction. Although the information contained herein is assembled from sources believed to be reliable, its accuracy cannot be guaranteed. Past performance does not guarantee future performance. No chart, strategy, software, program or tactic can guarantee gains or avoid losses. No assurance can be given that trading objectives will be met. Futures and Forex trading involve a substantial risk of loss and are not suitable for all investors. Please carefully consider your financial condition prior to making any investments.
