The dollar rallied yesterday around renewed sovereign debt fears in Greece and traders taking a hard look at when the Fed will begin to tighten U.S. monetary policy. A glut of European data releases will be driving trading into the weekend. With the holidays and New Year approaching, today’s volatility may become a factor as trading desks begin to thin out.
USD – Dollar Climbs to Three Month High Versus the EUR
The Dollar once again made large gains against a basket of currencies during Thursday’s trading, climbing to a new three month high. Fueling the appreciation of the dollar were fears of Greece defaulting on their sovereign debt as traders looked to avoid the euro. Analysts are also forecasting just when the Fed will initiate its tightening of U.S. monetary policy.
Today the dollar rose by more than 0.9% versus the euro to close at 1.4389, up from an opening price of 1.4522. Driving the change in the exchange rate was the downgrade of Greek sovereign debt by the rating agency, S&P. The firm also warned of potential future downgrades unless major changes to the fiscal status of the nation are undertaken. The downgrade of Greece is weighing on the EUR as traders are now looking at the U.S. economy in a better light relative to the European economy. This is also causing traders to reexamine the potential of the Federal Reserve to increase interest rates. No change was made at the conclusion of the FOMC meeting on Wednesday; however, with the rally of the U.S. dollar, the Fed may reevaluate its decision at it next meeting.
Friday’s trading will be highlighted with a glut of news events and economic data releases from the Euro-zone. The prime market mover will be the German Ifo Business Climate. The survey from manufactures, builders, and retailers is highly respected and shows a high correlation with the German economy. The indicator is s scheduled to be released at 4:00am GMT. The trend of the strengthening dollar may continue into today’s trading day with the EUR/USD seeing a significant support level at 1.4270.
EUR – Greek Sovereign Debt Sinks the EUR
Traders and economists alike are taking a hard second look at the European economy after S&P downgraded the sovereign debt of Greece yesterday. This is causing a shift of opinion on which economy is recovering from the recent recession faster; the U.S. or Europe?
As the debate rages, currency traders are showing their true colors. Some feel the EUR’s run may have extended too far as the EUR/USD climbed to a height of 1.5143 in late November. Since then the pair has fallen and is now trading below the 1.4350 level. Causes of this have been an improvement in U.S. economic sentiment, a potential tightening of U.S. monetary policy and rising interest rates, and the view of overall weakness in the EU economy.
While the stronger economies of Germany and France seem to be pulling out of the economic recession due to large government stimulus packages and previous EUR weakness, the smaller, less fiscally responsible nations of Greece, Spain, and Austria may hold the Euro-zone economy back in its recovery when compared to U.S. One advantage the United States has over the European Union, when it comes to fiscal responsibility national cohesion with only one decision making body in the federal government.
JPY – Yen Rises Against Dollar Where Others Fail
Despite the dollar’s appreciation yesterday against most major currencies, the Yen showed significant strength as the USD/JPY dropped 0.7% and is now trading at 89.5656. In earlier trading, the pair failed to break the significant 89.00 support line.
Japanese officials worry that a strong Yen may have an adverse affect on the Japanese economy. Yesterday, comments were made from deputy Prime Minister Kan, noting he supports a weak yen. A weakening yen could be a blessing to Japan. A falling yen would make Japanese exports cheaper on the world markets, thereby boosting the economic recovery of the island nation and avoiding a second recession.
Crude Oil – Dollar Strength may be putting a Dent in Crude Prices
Crude oil prices were seen falling yesterday but were able to regroup and finish the day even as the dollar rose against the EUR. Prices fell to a low of $72.87 from $74.79 yesterday as the dollar rose against the EUR 0.9%. Crude prices have typically moved in the opposite direction of the dollar’s movement. While this proved to be a positive for crude oil prices during times of dollar weakening, the dollar’s recent bullish run could put a dent in crude oil’s price appreciation.
As economic sentiment improves in the U.S., crude traders may feel the pinch of a stronger dollar. This is natural as the price of crude oil is denominated in U.S. dollars. A rising dollar makes crude prices more expensive and less attractive. A rise in U.S. interest rates would also be a negative for crude oil. With these factors, we could see crude oil drop back down to a fair value of $70.
The price of this pair appears to be floating in the over-sold territory on the daily chart’s RSI indicating an upward correction may be imminent. The upward direction on the hourly chart’s Momentum oscillator also supports this notion. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The 4-hour chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the daily Chart’s RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops might be the right strategy today.
The pair has been range-trading for a while now, with no specific direction. The Daily chart’s Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
The pair has recorded much bullish behavior in the past several days. However, the technical data indicates that this trend may reverse anytime soon. For example, the daily chart’s Stochastic Slow signals that a bearish reversal is imminent. . Going short with tight stops might be a wise choice.
The Wild Card
Gold prices are once again dropping, and it is currently traded around $1105.40 per ounce. And now, the daily chart’s RSI is giving bullish signals, indicating that gold prices might go up. This might give forex traders a great opportunity to enter a very popular trend.