U.S. Dollar Turns Weekly Trend Up

The U.S. Dollar Index erased all of yesterday’s loss overnight and turned the main trend to up when it crossed a previous main top at 76.82. Traders are increasing bets this morning that the Fed will raise its key interest rate by at least a quarter-percentage point from near zero by June.

The U.S. Dollar Index erased all of yesterday’s loss overnight and turned the main trend to up when it crossed a previous main top at 76.82. Traders are increasing bets this morning that the Fed will raise its key interest rate by at least a quarter-percentage point from near zero by June.

Traders are basing their projections on the recent series of good economic reports, namely the unemployment rate and retail sales. Expectations are for the Fed to revise the language in its statement to represent a more hawkish outlook while revealing signs of an earlier exit from low rates than previously estimated. Aggressive traders are already giving the Dollar a boost based on this projection.

The key to sustaining the rally in the Dollar will be Fed Chairman Bernanke. The question investors are asking is “will he validate an early exit scenario?” Lately he has been downplaying the need for higher interest rates because of his concerns about the sustainability of the economic recovery. He doesn’t want to raise rates too early or too late.

Traders will be watching the Fed’s statement tomorrow for a hint of a rate hike. Market participants will be disappointed if the Fed maintains its current dovish stance. In its November statement, Fed officials pledged to keep rates near zero for “an extended period”. They also specified that the current loose monetary policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. Since this statement, the unemployment rate has declined from 10.2% to 10.0%. The drop in the unemployment rate should be enough for the Fed to lighten up the tone in its December statement.

Today’s producer prices report is expected to show an advance. This news should be supportive for the Greenback as it would force Dollar traders to readjust short positions to readjust their positions and fuel more speculation that the Fed is getting ready to begin a tight monetary policy campaign. Other reports which may trigger the same response from traders include industrial production and the NAHB Housing Report.

The EUR USD took a hard hit overnight following the release of the German ZEW Economic Expectation Index report. The Euro fell to a two-month low versus the Dollar when the ZEW report showed a decline from 51.1 in November to 50.4. Going into this report, Euro investors were cautious about the economy because of credit downgrade concerns in Greece, Spain and Portugal. Adding further to the weakness is a report that Austria nationalized a bank last night and may be facing a banking crisis.

Technically, the EUR USD is headed toward a major uptrending Gann angle from the March low at 1.2456. This angle comes in at 1.4496 today. In addition, a minor .618 retracement level is at 1.4465. Breaking under these two levels will be bearish for the long-run, but oversold short-term indicators could trigger a technical bounce or short-covering rally.
Despite the weaker Euro and signs the Fed is getting ready to hike interest rates, the GBP USD remains inside of a retracement zone at 1.6292 to 1.6154. Overnight news that November CPI increased to 1.9% was largely ignored by traders since the pre-report guess was for an increase of 1.8%. This currency is not likely to move until it breaks out of its short-term trading range.

The increased outlook for a rate hike by the Fed is helping to boost the USD JPY. Traders are becoming more confident that the Fed will hike rates sooner than expected while the Bank of Japan is expected to keep interest rates unchanged at 0.10% on December 17th. The increase in the spread between the two interest rates is triggering a reversal in the carry-trade. Investors are buying Dollars to payback loans while simultaneously borrowing Yen.

Yesterday’s news that that Abu Dhabi bailed out Dubai made traders rethink their position about using the Yen as a safe refuge. Technically, the USD JPY held a test of a 50% level at 88.58. The current formation rally indicates that 89.46 is the next upside target. Taking out this level signals a further rally to 90.13.

Weaker Gold and the stronger Dollar are helping to trigger an overnight rally in the USD CHF. This market is now at its highest level since October. Look for the old top at 1.0337 to become new support.

Weaker gold and crude oil should put pressure on the Canadian economy which is likely to lead to a strong rally in the USD CAD. This currency pair currently remains rangebound with 1.0691 the upside objective and 1.0459 the downside support.

The AUD USD is feeling downside pressure overnight as traders lowered to 66 percent from 80 percent the possibility of a Reserve Bank of Australia rate increase at its next meeting on February 2nd. The RBA minutes from its last meeting released last night, showed that arguments for a third rate increase are “finely balanced”. This change in member attitude had the effect of “materially shifting the stance of policy to a less accommodative setting.” In other words, its time to take a pause in rate hikes. Technically, the Aussie rejected 50% resistance at .9167.

The NZD USD is trading lower overnight. This market hasn’t been able to attract any buyers since the spike to the upside last week after the release of the hawkish statement by the Reserve Bank of New Zealand. It’s beginning to look like the two day rally was enough for investors to adjust their dovish positions. The chart indicates that .7180 to .7148 is a potential downside target.

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

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