This Week’s Forex Price Action Indicates Dollar is ready to Rally

The strong recovery in the U.S. Dollar late in the week and the inability to break it sharply lower could be a sign that a short-covering rally is imminent.

The strong recovery in the U.S. Dollar late in the week and the inability to break it sharply lower could be a sign that a short-covering rally is imminent. Rumors the Fed may begin to raise interest rates earlier than expected, a poor U.K. economy and fear of intervention all helped boost the Dollar on Friday.

The uptrend continued on the daily USD JPY chart as rumors swirled that traders are betting the Fed will raise interest rates sooner than expected. Traders who sold Dollars and bought Yen when U.S. interest rates became the lowest in the world are not being forced to buy back their positions. This is helping to boost the USD JPY. There will come a point when the Yen once again becomes the world’s carry trade. The Dollar should rally substantially and equities should break hard when this occurs.

The GBP USD erased all of this week’s gains on Friday following the release of a report which showed that the U.K. recession is continuing. Traders had been betting that the 3rd Quarter GDP would show that the U.K. economy was expanding itself out of the recession. In addition, recent comments from a Bank of England official hinted that the BoE would end its asset-purchase program early. Today’s GDP news forced traders to rethink those positions which led to a massive sell-off. Look for the liquidation to continue into next week as it is clear that the BoE is going to leave its benchmark interest rate at very low levels for a prolonged period of time. The poor economic number is also a sign that the BoE is not in a position to end its stimulus program either.

The EUR USD traded several times over the $1.50 barrier before eking out a small gain above it on the close. The bulls are trying to establish support at this price while maintaining an orderly rally. Too much volatility and excessive speculation will drive this market higher and invoke the ire of the European Central Bank. The ECB is growing concerned about the rapid rise in its currency and the possible negative effects the price rise has on Euro Zone investments. The ECB is expected to continue to make verbal attempts to push keep its currency from running away to the upside, but a sustained rally over $1.50 is expected to draw a more aggressive response. This is why traders are shying away from the Euro at current levels.

Look for gains to be limited in the USD CHF or even downside pressure if stories are true that the Swiss National Bank is ending its currency selling program. Since March the SNB has been systematically selling Swiss Franc in order to prevent a deflationary scenario from developing. Recent reports show the economy expanding and inflation reaching more normal levels. This should help stabilize the Swiss Franc or perhaps even trigger a rally.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More