Dollar near a 3 Month High on Signs of Economic Recovery

Better than expected Chicago Manufacturing Index and lower equities pushed the USD to new highs versus the EUR and JPY Wednesday. Trading is expected to be extremely light today as markets close early ahead of New Year’s Eve. Light trading tends to exaggerate currency moves.

Economic News

USD – Dollar Rises on Better than Expected Economic Data

The Dollar rose against the EUR and the Yen Wednesday as weaker equity levels reduced demand for riskier assets. The Dollar bought 92.43 Yen, the highest level since Sept. 8. The Dollar advance 0.1% to trade at $1.4338 versus the EUR. It reached $1.4273, the strongest since Dec. 23.

The greenback was boosted slightly following the release of a stronger than expected Chicago PMI for December. The Institute for Supply Management-Chicago Inc. said yesterday its business barometer increased this month to 60, the highest level since January 2006. Investors’ expectation was a slight decline to 55.2.The index reinforced expectations that U.S. interest rates could move upward sooner than previously expected.

The Unemployment Claims are due to be released today at 13:30. Economists expect the number to rise slightly to 460K from 452K. If the result is as expected the Dollar may come under pressure. Furthermore, liquidity is quite thin this past week which is typical for the days between the Christmas and New Year’s holiday breaks. Very light trading tends to exaggerate currency moves.

EUR – EUR Down on Lower Equities, Profit Taking

Profit taking and low liquidity ahead of the new year set the tone for Wednesday’s trading. A decline European and U.S equities dampened demand for riskier currencies and eroding demand for the EUR. The EUR dipped below $1.43 earlier in the session but has recovered most of the losses to currently trade at $1.4360. Late afternoon Wednesday in New York, the EUR was at $1.4336 from $1.4349 late Tuesday and at Y132.56 from Y132.09. The U.K. Pound was at $1.6078 from $1.5902.

The EUR came under pressure as the European Central Bank (ECB) stated Wednesday that lending to the private sector was down 0.7% from November 2008, the third consecutive monthly decline, signaling the Euro-Zone’s recovery remains fragile.

Trading is expected to be extremely light Thursday as Japanese markets will be closed and European and U.S markets will close early for New Year’s Eve. Some news releases are expected from the U.K, however, with the release of the Nationwide HPI due at 7:00 GMT and the BOE Credit Conditions Survey at 9:30 GMT.

JPY – JPY Down on Policy Dissatisfaction

The Yen weakened versus the Dollar yesterday following a report by Reuters claiming that Standard & Poor’s said Japan’s AA credit rating may be threatened if policy measures fail to stabilize and gradually reduce the nation’s huge debt burden. The Yen’s losses versus the Dollar intensified after reports suggested that Japan Airlines Corp. may declare bankruptcy. With the Japanese market closed today, the Yen’s movements will be determined by the news coming from the U.S and European markets.

OIL – Crude Continues to Rise on Drop in Stockpiles

Light, sweet crude for February delivery settled up 41 cents, or 0.5%, at $79.28 a barrel on the New York Mercantile Exchange, the highest settlement since Nov. 19. Oil rose for a 7th day as U.S. Oil and fuel stockpiles fell to their lowest point since March as colder weather in the U.S. increased demand for heating fuels. Oil prices have risen 14% since Dec. 14, and are less than $2 below their high for the year.

Oil closed at a six-week high yesterday as Crude stockpiles fell by 1.5 million barrels in the week ended Dec. 25, the fourth decline in a row. Further boost to Oil prices came due to concerns that unrest in Iran may affect supplies from the second-largest producer in the Organization of Petroleum Exporting Countries (OPEC). Signs the U.S. economy is recovering from the recession have also boosted prices.

Technical News

The 4-hour chart shows that the momentum is still bullish. However, its Relative Strength Index (RSI) floats near the upper line indicating that the current trend might be closing to its end. On the hourlies, the local bearish correction is already intact. A bearish cross of the 2H chart’s Slow Stochastic validates that correction as well.
The pair is in the midst of a very strong bullish move, as it rose more than 200 pips in one day. And now, as the Slow Stochastic on both the hourlies and the daily chart are pointing up, it seems that the bullish move might extend. Going long appears to be the preferable choice today.
The pair’s bullish sprint has passed it through the 92.40level yesterday. As all oscillators on the 4 hour chart are pointing up, the pair might test the 93.50 level – making a 3 month record.
It appears that the pair has fully resumed its downtrend and is currently testing the 1.0310 level. If the breach will indeed take place, another bearish movement is likely to take place, with a target price of 1.0280.

The Wild Card

For the past few days Crude Oil prices rose to almost $80 a barrel at what seems to be a mild bullish correction. However now, the Bollinger Bands on the 4-hour chart are tightening, indicating that a strong move is impending, and a bearish cross on the 4-hour chart’s Slow Stochastic is taking place, suggesting that Crude Oil is resuming its downtrend. This might be a good opportunity for forex traders to enter the trend at a very early stage

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